Diversified Perpetual Real Estate Income Fund, With Humphreys Capital

Humphreys Capital was a presenting partner at Alts Expo May 2023, a one-day virtual event hosted by WealthChannel. In this webinar, Grant Humphreys presents the Humphreys Real Estate Income Fund (HREIF).

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Webinar Presenters

• Grant Humphreys, Humphreys Capital

Webinar Highlights

• Background on Humphreys Capital, a business where 100% of the employees are also owners of the firm.
• Summary of the current HREIF portfolio, including a breakdown of asset allocation to core, value-add, and opportunistic strategies.
• How Humphreys Capital builds and fosters lasting partnerships with developers.
• Summary of how HREIF’s allocation has changed to pursue opportunities in today’s higher inflation, higher interest rate environment.
• Breakdown of historical and current HRIEF performance.
• Overview of fund terms, including distributions and fees.
• Live Q&A with webinar attendees.

Connect With Humphreys Capital

• Humphreys Capital – Official Website
• Humphreys Capital on LinkedIn
• Grant Humphreys on LinkedIn

Webinar Transcript

Jimmy: Our next presenter is Grant Humphreys with Humphreys Capital. He’s going to be presenting the Humphreys Real Estate Income Fund.

Grant: Hey. So I appreciate the opportunity to present. As Jimmy said, I’m Grant Humphrey’s, president of Humphreys Capital, and we’re based in Oklahoma City. We focus exclusively on real estate investments in the United States. Today, the thing that I wanna make clear through the next 20 minutes is this, we believe that long-term relationships that are based in shared values and are rooted in a conscious structure of alignment, can create opportunities for success that has stability and the ability to perform through changing market cycles, through volatile times in the market and through these economic cycles that we find ourself in today. We’ve been doing that at Humphreys Capital. I’ll also be presenting Humphreys Real Estate Income Funder or HREIF as we call it. So Humphreys Capital is the manager, HREIF is the fund. It’s an open-ended, long-term, perpetual life real estate fund that combines core value-add and ground-up opportunistic investment. And we find it unique in several ways, which I’ll get into.

But today, the audience that we’re speaking to, many of you are high-net-worth individuals, as I understand. And I just wanna talk a little bit about our investors that we serve. So over the last 11 years, we have brought in 723 investors under Humphreys Capital. And starting at the largest investors, the institutional endowments, foundations, we have a few of those and they tend to appreciate the services that we provide because, you know, we generate strong returns. We generate capital preservation, and we have a long-term track record of performance. And we’ve worked through their due diligence questionnaires, and answered their concerns. We’ve gone through the deep screening that institutional investors require. Second group that I’d point to, is that we’re on several RIA platforms. So these registered investment advisors see us as a great option to bring real estate in, sometimes as an alternative to fixed income that meets their clients’ diversification needs within their portfolio.

Third group are family offices, and we have several family offices that we serve. Our family, the Humphreys family is still the largest investor in HREIF. And so, amongst different trusts and entities, and groups that we have, you know, we are eating our own cooking as they say. And so, there’s structural alignment in that, that we’re in the same position as our investors. We didn’t call it a family office, but many would look at what we did and say as we managed our family business interest, that we’re functioning in that way. And that brings us to the last category where many of you all are today, and that’s high-net-worth individuals. And over the last 11 years, we’ve been making it our practice to serve primarily high-net-worth individuals. More than half of our investors come from this camp. High-net-worth individuals, they appreciate the income that comes from HREIF, they appreciate the ability to take the long view of real estate and to set up generational wealth transfer, and capital preservation. Now, over the last 11 years, I’ll show you in this presentation that, you know, we’ve made monthly distributions in HREIF every month since its founding in 2012. We haven’t missed a month, and we continue to make that dividend. That’s a stake in the ground that we say this is a defining characteristic and a competitive advantage of HREIF is that monthly distribution of income.

Currently, we’re distributing 7.5% annualized, but the story doesn’t just stop there. We, later this year, 2023, this will be the 40th anniversary of a time in 1983 when my dad, Kirk Humphreys, put together one of his first partnerships. It was his first syndication, it was for a QuikTrips convenience store in Mission, Texas. And he brought in investors that had been in his wedding, people that he knew, people that did life with him for some time. They knew and they trusted Kirk Humphreys, they invested with him and they started to receive a regular distribution. That continued and they stayed with him for 30 years until 2012 when HREIF was formed. And they rolled into HREIF as the original group of investors that saw HREIF become a diversified real estate fund. So they started at the project level, they rolled into the fund level, they’re still with us today. So we’ve been making these regular distributions for only 40 years, month after month, after month for 40 years. So, quite a story, happy to tell you about it. And we’re gonna do a screen share here. All right. Is that visible Jimmy, can you see it right?

Jimmy: That does look good. Yes, Grant.

Grant: Okay, great.

Jimmy: Go on.

Grant: So at Humphreys Capital, and because of time, I’m gonna read from the script here, just so I stay on track, I could go over easily. Here’s the disclosures. Take a screenshot if you want it. Here’s our team. Let me start with our team. We say “You don’t invest in projects, you invest in people.” So allow me to start by showing you the experienced team that we have at Humphreys Capital. At Humphreys Capital we’ve, you know, over the last 11 years, it started with my dad, Kirk, who’s top row on the right. And it’s now grown to 26 professionals with diverse backgrounds and syndication, development, institutional investment and portfolio management. A hundred percent of our employees are owners of the firm, and we see that as a real feather in our cap that brings about alignment at the firm level. I know these people to possess uncompromising character, exceptional capacity, proven commitment that results in long-term stability for our company.

So top row, the investment committee is consisting of myself, my brother Blair, our father Kirk. The three of us have served on the investment committee since the fund’s formation in 2012. We’ve never had a split vote. We worked through each investment opportunity until there’s solid consensus. For the last three years, Blair and I have been the executives in charge of the company. Dad is still in an executive chairman role, but he has handed over the reins of the company three years ago after a multi-year generational transition plan. Next row down is our managing directors. These guys have an average of eight years with Humphreys Capital and several of ’em come from relationships that go back decades. And these guys, we’ve assembled what we see as a dream team of guys that work well together and lead their respective teams effectively. Most of you would interact with Ben Stewart who is on the right. He’s the senior managing director of investor relations and he serves our investors well, he and his team under the IR. After the past several years, or over the past several years, we’ve also assembled a stable of directors and associates as you can see here, who each have a great story, unique skill set that results in our continued growth. So we have an experienced team.

This slide shows our firm’s growth over the years. In 2012, as I mentioned, HREIF was established. We held 36 QuikTrip properties that were valued around $50 million. Our intent was to grow and diversify the portfolio with a conservative amount of leverage and the goal of continuing to deliver this stable monthly distribution to investors. Between 2017 and 2021, we also introduced three closed-in funds. So we’re doing the open-ended perpetual life fund in HREIF, and these three closed-end funds, which are performing well and delivering a strong investment to, or strong return to our investors. Today, HREIF represents 1.2 billion in AUM, that’s across 68 properties, 24 markets. And as an institutional fund manager, we’re managing 1.4 billion in AUM across 82 properties. So as we look ahead, we’re bullish about the future of U.S real estate and we expect that we’ll be able to realize stable performance and continued growth, even as we continue through this economic cycle.

So today, we’re gonna focus on HREIF and let me look at the current portfolio. If you look on the left side of the screen, you see that a majority of our positions are held by a diversified mix of 7,000 multi-family apartment projects, where we’ve seen rent growth that’s continued to outperform proformas. In the upper right you see that most of our property has stabilized occupancy with reasonable exposure to opportunistic ground-up development. So 75% of our properties are either core or value-add with stable occupancy. The chart down to the lower right shows our map, geographically, we focus on select submarkets and metro areas with high growth dynamics and strong economic fundamentals. So to the West, you see us in Phoenix and Denver. To the South, we love Texas markets. In the Midwest, we find stability in markets like Kansas City and Indianapolis, and even up into Minneapolis. And then to the East, we’re in the Carolinas, Atlanta and Florida markets.

Now the last several years in real estate have been like a tale of two cities with certain cities being the haves and others being the have-nots. And over the past 11 years, through economic ups and downs, and pandemics and inflation, we’re blessed with a risk-mitigated position in sectors that perform well and in cities that outperform the others. And this has proven to be a very effective strategy for HREIF. Our strategy rests in maintaining the long view of real estate. So, we look past immediate volatility and we track secular trends that impact property appreciation over the long-term. So this is evidenced in two key components of HREIF that I just wanna point out. First, we’re committed to maintaining a portfolio diversification across market sector and strategy. So each element of diversification plays an important role in our ability to maintain stable performance through seasons of disruption like we’ve seen today. Secondly, we underwrite for income, regardless of the strategy. We understand that each project has key factors that determine its ability to deliver on expectations.

We’ve seen all the ways that a deal can go south and we have learned from past experience, you know, from stabilized cash flow of a core position, to the way that inflation hedging characteristics and protection are found in value-add positions to, you know, the capital appreciation found in opportunistic development. We blend the risk return profiles of each strategy into a composite that performs superior to what we see in other shops and in a format that is convenient to the investor. So I mentioned at the beginning how we believe that value-based relationships coupled with these structures of conscious alignment provide for long-term success, and that the success has the ability to perform through seasons of market disruption and all stages of the economic cycle.

The dynamic, this dynamic, it exists with our investors, but it also applies with best-in-class partners on the project side. So we see ourself as a strategic equity partner in joint venture relationships and we’ve established 97 joint venture partnerships with 36 development partners over the past 11 years. This chart shows how we grow these relationships that bear good fruit over the long-term. So first of all, in terms of our vetting process, we spend several years cultivating a relationship as we vet performance. And in this season we look at a lot of deals. In any given year, we will look at 1,200 opportunities that come across our desk and we ultimately invest in about 2% of the opportunities we see. So on the left side, the small dots in the lower left-hand corner, you can see these 10 smaller dots. These are emerging managers and project sponsors that we see as prospects for long-term partnership. We believe in investing with one, giving someone the ability to be faithful with a little before we give them a lot. And so, we’ve worked hard to negotiate an aligned partnership structure that helps us keep pulling on the same end of the rope when a project encounters market headwinds for inevitable challenges.

In the middle you see a group of larger dots. And these are partners that we’ve done up to six deals with over the past five to seven years. They’ve proven themselves to us, we’ve become a strategic partner for them and we’re helping to facilitate their continued growth. And to the right you see these larger dots on the right side of the screen. And these represent the key relationships that we depend on month after month to provide a pipeline of opportunities over the long-term. We know these partners deeply, we’ve established a deep mutual appreciation for them. We know what are the key points that drive their success and how do we work together to make sure that we’re aligned. So these relationships give us efficiency as we use these proven partnership structures that we have negotiated terms, understood values. This has allowed HREIF to commit 85% of our joint venture capital with repeat development partners. So over the last number of years as we’re deploying this capital, 85% of it is going out to folks, we know their values, we know what kind of car they drive, we know their trigger points, we know the negotiated deal terms that drive success.

Looking at the next slide, I want to take a look just to point where we are today in the dynamic shift that we’ve seen because of the change in the rate environment over the last 12 months. It brings us to this slide. And there’s a real need for a firm or a fund to have the ability to be agile during times of rapid change. So if you look on the left side of the screen, you see before our world was rocked by the COVID pandemic, less than half of the HREIF portfolio was invested in the multi-family sector. At this time our QuikTrip properties and we’re the second largest landlord for QuikTrip nationally. So we’ve had a long 40-plus-year relationship with QuikTrip. That property portfolio represented 28% of HREIF and we are excited for the stability of that. But we also, you see the 13% in industrial, we saw great opportunities for value creation in the industrial sector in 2019. From 2015 through ’19, we had assembled a portfolio of industrial properties in DFW and Phoenix, and we expected to continue to execute the strategy for the long-term, a buy and hold strategy.

We’ll fast forward to our current portfolio in 2023. A few things to point out, one, HREIF has grown significantly. So the QuikTrip properties, even though we have not disposed of those, now represent just 11% of the overall portfolio. In 2021, you see industrials down to 4%. We sold that DFW and the Phoenix Industrial Holdings for a price that was only conceivable in the white-hot market frenzy of 2021. So we all know it’s great to sell a property for a win so long as you have the opportunity to reinvest into another position that can still help you to achieve your investment objectives without giving up return and performance. So we decided to sell the industrial holdings and we noted it for two important reasons. First, we believe that the industrial market would never be hotter than it was in 2021. It’s a cyclical market, it goes up and down, and we ended up selling at the peak. If you’ll recall, capital markets were pumping money into the industrial sector like never before. They had driven down cap rates, they were setting records on property valuation. And with any real estate, if you don’t sell on a given day, you’re choosing to buy at that price. So we sold and we took a home run for our investors.

Second point, was that because the Fed’s action in 2020 and 2021, we knew that inflation was on the horizon and that the rate environment was about to explode. We discussed the coming inflation with our investors in written investor updates in early 2021, and we set out at that time to position HREIF into an inflation hedged position so that it would have the best chance to overcome expected season-of-cap-rate expansion. So today, if you look at multi-family, hospitality and self-storage, 78% of our HREIF portfolio are in property sectors that we see as inflation hedged characteristics. These properties have the ability to adjust rates on a daily or a monthly basis as inflation continues to persist. And we think this conservative posture will help serve us well for several years as we continue to work through elevated levels of inflation. As we look ahead, like I said before, we remain bullish on how the secular trends seen in the U.S housing market will serve to bolster demand for multifamily properties, allowing rental rates to continue to keep pace with inflation as cap rates stabilize and as a new normal is realized in the rate environment. And we have strong confidence that HREIF is well positioned to perform well into that season.

We’ve got three sides left and one around third base and head home. Let me share about our current performance and our fund terms. HREIF features a quarterly equity raise and we’re open for business investment today. We continue to stay open until the last 15 days of every calendar quarter. That’s a blackout period where we reprice our units and we complete evaluation process that happens on a quarterly basis. So, our unit price is currently $142 per series one unit. This price is set on a quarterly basis, as I’ve said, following a diligent third-party valuation process. And let me spend just a minute sharing some comments about how we approach valuation. First, the quarterly valuation process is administered by Capright, who’s a respective leader and a voice of valuations for alternative investments industry. Capright’s work is then verified by FORVIS, who handles our annual audit and they’re a top 10 accounting firm, who works with CB Richard Ellis to verify the most recent Capright evaluation as part of their annual audit.

We’ve invited this rigorous transparent third-party process to provide our investors with a deep assurance regarding the value of their position in HREIF. So as you go across the top line there, our current distribution is $10.60 per unit on an annualized basis, that equates to a 7.5% distributed yield. Typical distributions from other funds that are open-ended funds are typically between 4% to 5%. So we see this as a strong competitive advantage that sets HREIF apart from the rest. The chart below that shows how our monthly distributions have been stable and consistent. Each one of those vertical lines is a monthly distribution. And since we formed HREIF in 2012, as I said at the beginning, we’ve delivered this monthly distribution to investors on the first business day of every month. We see this as a hallmark of the HREIF investment vehicle.

In addition to the distributed yield, we’ve also realized strong appreciation over the last 11 years. And our portfolio value has proved stable through the ups and downs of economic change. A couple times that I point out, just to show how we respond to these times. In 2020 we realized a minor reduction of value and in our dividend in the early stages of COVID, that there was consistent performance through the next couple of years of growth and recovery. And in late 2022 we marked down our portfolio more than 7% because of the changing rate environment and its impact on cap rates. Now our properties are performing well. We have 94% occupancy in our multi-family holdings. Rent growth continues to exceed proforma, continues to outpace inflation. But we wanna be honest and transparent about what happens to real estate values when cap rates expand. And we expect that our share price will recover and continue to grow over time. This was evidenced just a few weeks ago when our portfolio realized small, just 75 cents a share, but it was an increase following the valuation process after Q1. And in a market like this, we think that holding your ground is actually winning. So we celebrate these small wins.

Last two slides, one on performance. You know, the factors that we’ve discussed, our team, our diversification, key relationships, the ability to have agility in times of economic change and the ability to hedge against inflation, these have culminated in performance picture that we take a great deal of pride in. When you look at the past 5 years, HREIF has delivered an 8.6 net IRR, and a 1.42 multiple. Our 10-year picture is stronger with 13.3% total net IRR to the investors. As we look ahead, we think every asset class and every fund manager will face headwinds that have not been present over the past 10 years. As inflation persists, investors will be looking for positive real return, and many asset classes and firms will be hard pressed to meet that need. When you look at private real estate with a diversified portfolio and an aligned structure such as HREIF, you find an opportunity for stable income and consistent performance that’s hard to beat. And when you consider the tax advantages of private real estate, I think that HREIF should be an important component of every investor’s portfolio.

So to sum up with HREIF, I wanna lay this out very clear. We have created an investment vehicle that is aligned with investors, that’s straightforward in its structure and is competitive in its rates, and its performance track record. This translates to a low advisory fee. We only charge 65 bits versus a typical 1.25%. And this feeds into a 25% carry that’s based on distributions, not total return, it’s based on actual distributions in your pocket, after a 6% hurtle on the trail in 36 months. We think this structure keeps Humphreys Capital aligned with LP investors and the LP investors of HREIF, so that we only win when the investors’ expectations are fully realized.

So that wraps it up. I appreciate your time and your attention today, and I appreciate, Jimmy and Andy and the crew for putting this Alts Expo event together. And I hope it was fruitful for you. In the coming days, I’ll be happy to personally reach out to everyone who has attended this event. And if you’d like to find some time to connect, you can see my phone number, my email address right there and we’ll connect you with Maggie and our investor relations team, and our whole team at Humphreys Capital. Thank you.

Jimmy: Maggie’s great, she’ll take care of you. Thank you, Grant, for participating today. We got time for a couple of questions before I cut you loose, and we do have a few questions from the audience. And if we don’t get your questions answered because we got a lot of ’em, you can reach out to Grant and his team.

Grant: Sure.

Jimmy: Visit their website or call the number, or email Grant right there on the screen. First question from Ernest. Ernest wants to know “What is the minimum investment?”

Grant: Sure. Minimum investment is $500,000 and we do have a lower minimum if you go through one of our RIA channels, for that we have $100,000, but for a direct relationship it’s a half million.

Jimmy: Good. And “Can the HREIF be used in 1031 exchanges?” That the question from Scott.

Grant: We’re looking at that right now. The answer today is no, not yet. We’re looking at DST and other structures that could incorporate 1031, but it’s a partnership share and a securitized transaction. Typically, people are coming outta direct ownership position, so it’s not a like, kind of exchange.

Jimmy: Question on tax returns, K-1 or 1099. What do you do for your LPs there?

Grant: So HREIF is interesting because you’re investing as an LLC member in an entity that owns a private REIT. The REIT allows us to simplify the tax return. We deliver one K-1 to investors and those have already gone out this year.

Jimmy: Good. In your open-end fund, how do you evaluate the NAV, and how often? Is there any periodic redemption policy and if so, is the redemption with any discount?

Grant: Yeah, great question. So, the quarterly valuation process that I talked about determines fair market value for each property on an annualized basis. Most of the assets that we hold are actually valued twice a year. And that’s done by Capright, then confirmed by FORVIS, and CB Richard Ellis. So, totally third-party objective on a quarterly basis. In terms of redemption, there’s a 12-month lockout period when you first come in. We see real estate as a long-term play and we’re not looking for hot capital that’s wanting to trade in and out. But after 12 months, investors have the option to redeem on a quarterly basis and any quarter there’s just 60 days’ notice that’s provided. At the stated price, at the price that we have at that time, you’ll be redeemed out at that price. We can go up to 2.5% of equity on any given quarter. We’ve never come close to putting down our gates, and we feel like that really comes to two factors. One is, you know, we have this aligned structure that people trust. They have the right view of seeing real estate as a long-term play, and the types of investors that we have are not hot money traders. They’re folks that are in it for the long-term and they know that we’re designed to weather these types of times in the market, so…

Jimmy: Good. We got time for one more question. Now, the vast majority of our audience today are coming to us from within the United States, but we do have a few ex-U.S. investors on the call with us today. Orlando wants to know, “Do you accept investors from outside of the U.S., like Brazil?” Is where he’s located, sounds like.

Grant: We’re happy to serve some international investors, but they’ve all come through with a domestic vehicle. So they’re setting up their own domestic investment vehicle and then investing through that. They’re getting their money across the border into that domestic vehicle. And so, to us, they are a domestic investor.

Jimmy: Good answer. Well Grant, we’ve run outta time. I’ll cut you loose here. Please do reach out to Grant and his team if you have any additional questions, if you’d like to start a conversation with them. Grant, really appreciate it, thanks for joining us today. Thank you so much.

Grant: Thank you Jimmy. And thank you everyone.