Investor Notes

Hi ,

It's been a wild few years. I'm fortunate (and old) enough to have been through another spectacularly confusing financial cycle in 2008. The challenges of the 2008 era were, in many ways, easier to navigate. It was very clear what went wrong. The roller coaster of the past few years, however, was more chaotic.

During all the chaos, we stayed heads down, doing what we know and refining what has become our primary investment principle: Underwrite What We Know.

First, we underwrite what is known, not what we hope. We make investment decisions based on financial characteristics we can see today (e.g. market rents, identified tenants, required capex). We don’t try to predict the future of interest rates or pursue investments that depend on an aggressive future sale or refinance to meet our base case return targets. We believe that if you invest in quality, income-producing assets in growing markets and avoid blowing up, long-term appreciation will take care of itself. - From FCP's 2024 Strategy Overview

You don't get awards for the deals you don't do

You don't have to look very far in commercial real estate to find someone in pain. So many acquisitions from the 2021-2022 era were, at the time, baffling to those of us with a more conservative lens on risk and probabilities.

During that era, we competed on a ton of deals only to be outbid by people who, we believed, knew something we didn't. In each case, we could easily have been sucked into the FOMO and created rosy financial models that told us (and you) any number of things that were believable but probably not true.

A friend in venture capital was interviewed recently about his firm's avoidance of crypto investments. "After a dozen people I respected made investments rising to hundreds of millions, we started to ask ourselves if we were in fact the dumb ones." That's how we felt late in the last cycle, before rates rose.

Tourists

Real estate is a business for two types of people: those with cheap capital and those willing to work. The third type, tourists, show up when it looks like there’s easy money to be made with quick flips. The last three years brought a lot of tourists and then, suddenly, washed them out.

If a good real estate asset generates 5% net income on its cost basis, then you can’t be surprised when demand for it goes up when debt costs are 3%. And that’s exactly what happened in 2021-2022. 2023 was a reset.

As Charlie Munger said, "I want to know where I’m going to die, so I never go there." One thing we know for sure is the most certain way to fail to compound is to implode mid-cycle.

Across our portfolio, we have no floating rate debt. All of our cash-flowing assets are performing at precisely the original proforma projections (or better). We don't lose sleep at night worrying about making our debt payments.

We don't get an award for the deals we didn't do. But we do get to exist.

Our Long-Term View

FCP is an operator. We benefit from market appreciation but don’t rely on it. We have a unique operating advantage across a region with a reputation for consistent, fair dealing and an interest in opportunities too challenging for other operators to consider.

Our approach converts hands-on work into returns, and how we do it is our key comparative advantage. This is especially true in our focus markets, which are historically more analog than top MSAs.

In our business, you implode by acquiring assets with insufficient interim cash yields to cover performance fluctuations or cost increases. This is easily done by taking on too much debt or overpaying for assets (or both). You implode by betting on a single improbable outcome to be successful.

Our long-term goal is to create slow, steady, compounding, tax-efficient wealth for our partners by acquiring yield-generating assets in growth markets for indefinite hold periods. Our view is that if we do this well, appreciation will take care of itself over the long-term.

We are not looking to be the operator with the biggest portfolio. Rather, we focus on unlocking outsized upside in specific, overlooked sectors that uniquely benefit from the boots-on-the-ground knowledge and relationships that out-of-market operators can’t easily duplicate.

The Next Twelve Months

The hangover from the frothy market creates an opportunity for us to acquire and develop assets in our very supply-constrained markets precisely because we think long-term and are willing to get our hands dirty. And as the market shifts, we're getting busier.

We are singularly focused on building an enduring, world-class business that improves as it scales. A good friend of mine describes it this way:

"A world-class business is a business that doesn't just win a market – it defines a category, dominates a field. Its name becomes synonymous with its industry. Its hallmark characteristic is not some single milestone or achievement, but enduring success over a very long period of time."

That's our goalpost, and the first priority is to endure.

We're grateful for your trust in us to manage your hard-earned capital and look forward to working more closely together over the coming decades.

Thanks,

Deal Performance Case Study

Cheyenne, 90 minutes north of Denver, at the junction of two major interstates and two railroads, continues to see extreme demand growth with limited growth in capable industrial supply. Microsoft is expanding its data center footprint. Another large tech company just announced a 945-acre development. And the defense sector continues to grow.

We recently successfully completed our strategy on an 82,000 SF asset we acquired in late-2021, a vacant single tenant asset we demised into three suites and leased to three national, credit-quality tenants.

That deal is projected to generate 8.45% this year and 13.27% next year, exceeding our projections. You can learn more about our recently executed deal in Cheyenne at the below case study.