Riding the regs
In the US, Regulation A has opened up doors for real estate companies and investors of all types, says Robert Kaplan of HC Government Realty Trust
The US Securities and Exchange Commission’s (SEC) Regulation A (Reg A) has existed in one form or another for over 80 years, but it wasn’t until Title IV of the Jumpstart Our Business Startups (JOBS) Act that it would have viability in today’s market. The JOBS Act, signed into law by President Obama in 2012, was created to ease regulatory restrictions and to encourage startups and small businesses to create jobs and stimulate the economy.
In June 2015, Reg A+ emerged, another alternative to a traditional initial public offering (IPO), which has made it easier for smaller, early-stage companies to tap into the capital markets and raise additional funds to expedite their growth plans.
Has it worked? Some may argue it most certainly has, and others will point to other factors that have stunted job growth. Whatever side you’re on, the fact is, an increasing number of companies are pursuing Reg A and A+, and over the past two years, the real estate industry in particular has found that they can be a channel for success.
According to FactRight’s Reg A+ research, since June 2015, 203 offering statements for Reg A+ IPOs were filed and 143 were qualified by the SEC. Within this, real estate was, and continues to be, the most dominant industry. A tier-one qualification is for securities offerings of up to $20 million in a 12-month period, and a tier-two qualification applies to securities offerings of up to $50 million in the same 12-month timeframe. As of Q2 2017, there have been 25 real estate tier-two qualifications.
I can go on about the legalities and intricacies of Reg A, as the law firm I founded, Kaplan Voekler Cunningham & Frank has worked with Congress on Title IV of the JOBS Act since its inception, as well as with the SEC on rules for implementation. I’ve testified before the US Senate Banking Committee on Reg A’s impact on the lower-middle markets and the alternatives industry. I’ve worked with dozens of real estate companies and even more Reg A offerings, and the take-away for me personally has been this: Reg A provides companies with far greater access to capital than was previously available to them, while concurrently providing individual investors, who before now were not privy to investments previously reserved for accredited investors to take part in early-stage companies, with the hope of long-term capital appreciation.
Enter HC Government Realty Trust
Today, I wear two hats. I continue to serve as a partner at my law firm and, more recently, I also serve as president of HC Government Realty Trust (HCGR), a real estate investment trust formed by myself and my partners to acquire, own and operate single-tenant, built-to-suit properties leased by the US through the US General Services Administration (GSA). Our leases constitute full-faith credit obligations of the US.
We filed our offering memorandum in June 2016 and became qualified by the SEC in November 2016. Since then, we have amassed a portfolio of 12 properties, with customers ranging from the US Customs and Border Patrol, US Citizenship and Immigration Services, the Federal Bureau of Investigation, the Social Security Administration, the Department of Transportation, the US Drug Enforcement Administration and others.
While we have closed on 12 transactions, we have several more in the pipeline. With access to capital generated from our Reg A+ offering, we intend to expedite our strategy further to build our highly protected asset base, while offering investors an opportunity to get in on the ground floor prior to our listing and generating a dividend with a targeted yield of 5.5 percent. We are seeking to raise $30 million through the sale of our common stock and are also pursuing other financing arrangements that will enable us to significantly increase our asset base, as well as adding to our ability to generate fixed-income returns and potential equity returns in the future.
Opportunities are growing
Not all Reg A and A+ deals may be right for the average investor. As with any investment, one should do extensive research before investing, reviewing websites, corporate collaterals, industry and financial research, and most importantly, SEC filings. The SEC filings is where one will find the risk factors listed, strategies unveiled and the investment considerations can be made. Here is also where investors which determine what Reg A deal may be right for them personally.
As I said, in Q2 2017 there were 25 real estate industry tier-two classifications, all of which remain in the qualification stage. Some of these entities are REITs, others are real estate companies and some have real estate holdings but operate in other related industries. Some of these companies are also further along in their capital raising efforts, while others have qualified but have yet to truly bring their story to market. The book has been written, but the next several chapters have yet to be read.
As an attorney, and as it relates to HC Government Realty Trust, I know these things take time. While I may not be on Wall Street, I do have a good sense of what companies are looking to accomplish and what investors of all types should be seeking. As I noted, not every deal will be a home run, but if investors spend time looking at business strategies, growth plans, assets under management, income statements, balance sheets and cash flows, they can make a more informed investment decision. But that’s not all. Companies may do great in the early stages, but to build a successful business for the long term, one must truly assess a company’s value proposition and offering vis-à-vis the competition; the compelling demand for its products, services or solutions; barriers to entry; and, what I believe to be one of the most important factors, strong corporate governance.
Building successful, sustainable businesses
Once a company lists on an exchange, the qualification process is over, and it’s time to be a true, public entity, which means significant restrictions in communications and a rather lengthy SEC reporting process. Those companies with strong boards and advisors, and those that have set up corporate governance practices well in advance of a potential listing, are often the companies that can weather any storm and that have the processes in place to adhere to their respective fiduciary responsibilities.
At HC Government Realty Trust, we began our journey with this very thought process in mind—creating a world-class team with the knowledge, expertise and relationships to build a sustainable, growing and income-generating business for our shareholders. With a targeted annual dividend of 5.5 percent, real estate assets backed by the full faith and credit of the US, and a team of real estate professionals that have collectively taken part in billions of dollars worth of real estate transactions, we feel confident that we can not only deliver near-term returns, but build a business that will, over time, endure and deliver sustainable value for our stakeholders.