Harvey Capital 2024 Annual Update
A commentary on our performance during 2024
Harvey Capital I LP investors,
Our gain in net worth during 2024 was $178,350.82, which increased our book value by 13.58% based on our weighted-average annual capital base, as the year remained open to investment throughout. Of this, $142,371.63 was realized (10.84%), and $35,979.19 (2.74%) is the unrealized gain on our marketable securities (REITs).
The fund is now considered closed and there will be no further investment in it. From here, the goal is to continue to grow the fund’s value until the lockup period ends.
My commentary on the above results is that we had a decent year given that it was our maiden voyage. My observation and experience over the years is that operating earnings tend to be a much smaller piece of the total return for a real estate venture than the gain (assuming it isn’t a loss) when a property is eventually sold. A nearly 11% return solely from cash generated (that can then be reinvested) in our very first year is not bad, in my opinion. Especially since we have zero debt employed currently. I am biased, however, so take it with a grain of salt!
Asset allocation
Throughout the year we were able to invest in several unique opportunities that will hopefully do well for us over time. Below is a visual illustration of our portfolio with the assumption that 2 loans we hold as the lender are paid in full in January ’25: (this is based on cash invested, not current market value)
DSP RB Meadows LLC – this is our largest single position (excluding cash) and is a 148-unit built-to-rent apartment community in Martinsburg, WV. The deal was put together by an experienced operator that I know very well and was acquired at a terrific price given the fact that it is 2023-built.
DSP RB West Wind LLC – this is a 95-unit built-to-rent apartment community in Stephens City, VA. Same operator as above and is also brand-new acquired at a great price.
Copper Properties Liquidating Trust – this is a trust formed to liquidate the real estate holdings of JC Penney. I touched on this in-depth in the mid-year update and will talk further on it below. This and the 2 prior properties are discussed in greater detail in the 2024 mid-year update.
Peakstone Realty Trust – this is our newest addition and is an office/industrial REIT that trades publicly. My belief is that it is worth slightly over 2 times what it is currently trading for and is unloved by the market in general for a few reasons. Their assets are made up of the following (based on annualized base rent received):
Office – 55.1% - these are not the typical class b/c office properties with multiple tenants that are struggling to stay occupied; these are newer-built single tenant net-leased (meaning the tenant pays all property expenses) properties that are overwhelmingly leased to investment-grade tenants. Their remaining WALT (weighted average lease term) is over 7 years, which is very strong.
Industrial – 24.5% - these are also net-leased properties functioning as warehouses, distribution centers, etc.
IOS – 10.8% - what the heck is IOS, you might be wondering! IOS stands for industrial outdoor storage, here is an example of an IOS property:
These are industrial properties where the tenant needs lots of open space for whatever their business is. Peakstone recently made a large acquisition ($490mm) of a 51-property portfolio made up of these kinds of assets and are the only institutional owner, to my knowledge, of these kinds of properties. While this is a very nascent asset class and hard to value, the fundamentals appear to make sense, and Peakstone claims that the leases can be marked up 70% as they roll. Which would add a lot of value if that is true.
These are also net-leased to credit tenants and have very little capital expenditure requirements as they consist mainly of slabs of concrete. And since they are eyesores, the existing ones have somewhat of a competitive moat given that cities don’t desire any more of them to be built – this should lead to good supply/demand dynamics.
Time will tell whether the price they paid was sensible or not. I also think there are tailwinds for these properties and industrial in general as Trump has been very open about wanting to bring production back to the U.S.
Other – 9.6% - their other segment consists of non-core assets and vacant properties they are in the process of disposing of.
My thesis in a nutshell is that Peakstone is being unfairly lumped together with all the other moribund office REIT’s, even though their office product is significantly more desirable. Their office holdings are a drag on the other industrial assets owned, and if you do a sum-of-the-parts analysis, it is not difficult to see that their net asset value (NAV) is much higher than it is currently trading for.
Peakstone is actively disposing of non-core office and is focused on the industrial segment moving forward, which will reduce their office holdings as a percentage of their portfolio over time. Negative news headlines have hampered office for years now, but once the market either relaxes their stance on office or realizes that Peakstone owns valuable office assets, the price should drift up closer to its true NAV.
Another thing to note is that Peakstone pays a dividend that is about 36% of their funds from operations (FFO). If a REIT pays out 70% of FFO, this is considered pretty healthy dividend coverage. When you get above this it gets riskier to maintain the dividend as they are operating with little margin for error. 36% is the lowest I have seen for a REIT paying a dividend and leaves plenty of margin for them to continue this dividend.
Lastly, with Peakstone owning 3 separate asset classes, this could set the stage for some activism to take place. Investors who own office usually don’t want to own industrial, and investors who own industrial usually don’t wont to own office. So, some sort of separation of these assets could potentially unlock value, and this has not been uncommon in the REIT world over the past few years. While we are in no position to effect change, it is possible that someone else sees the wide gap between what this trades for and what the underlying assets are worth and tries to unlock that value. This is pure speculation, although it is not without precedent as this has been done to various REITs in recent years. Time will tell!
Debt versus equity and the largest cost of all: opportunity
My stated plan during 2024 was to take advantage of hard money loan opportunities where we are lending funds at a great yield on low-risk properties. This is because these offer a great return while we patiently wait for the long-term equity plays to reveal themselves.
In 2024 we earned $55,845.07 on our weighted-average annual total funds lent of $370,698.63. This represents a 15.06% return.
If I only include the 3 loans in 2024 that went full-cycle and were paid off (all but one loan is considered payment-in-kind where interest accrues and it is collected when the loan is paid off), the interest earned was $28,845.07 and the weighted-average amount deployed was $112,287.67. Representing a 25.69% annual return.
While these are great returns, the Copper Properties (CPPTL) investment suggests that patiently waiting for mispriced equity opportunities might be the better move compared to lending funds at high yields.
We invested a total of $252,106.70 in this REIT from 7/2/24 – 9/3/24. The reason I stopped buying is because the price had risen to a level where I no longer felt there was an adequate margin between the price and what I conservatively thought it was worth. I still believe it is discounted, but not enough to make me want to buy more. The weighted average annualized amount invested was $106,670.60 in 2024, and our total return was $76,978.96. $24,529.98 of this was realized and the balance was unrealized gain as of 12/31/24.
This represents a 23% cash return and a 72.1% total return, when annualized. Unfortunately, I did not have the ability to load up on this one like I wanted to as we had some illiquid loans outstanding, but this was a good lesson on how opportunities like this are rare and we must be able to capitalize on them when they become available. I’ll get to more on this below, but while we are on the subject I want to highlight a few mistakes I made to put them out there, so I don’t repeat them.
Debt versus equity and the largest cost of all: opportunity
Below I will highlight 3 recognized mistakes I made throughout the year. Praise the Lord that no permanent loss of capital resulted from any of these.
Mistake #1: Emotional decision on Peakstone purchase – I have always strived to base decisions on facts, reasoning, and logic, so this mistake is especially painful. Once I decided to own Peakstone, I began acquiring shares gradually. Market volatility presented an opportunity to lower our cost basis by selling cash-secured put options, a strategy that could generate returns while positioning us to buy shares at a discount. While we collected premiums from these options, most of the contracts expired worthless, leaving us without Peakstone shares—our ultimate goal.
By mid-September, as REIT prices surged, I let emotion take over, fearing I would miss out on buying at a lower price. Instead of sticking to my plan of gradually building a position, I rushed to buy shares. This emotional decision led to a higher cost basis than I could have achieved with patience, though it is still below what I believe to be the stock’s intrinsic value.
This experience has reinforced my commitment to keeping emotion out of investment decisions. Moving forward, I will adhere to disciplined, logical strategies to avoid similar mistakes.
Mistake #2: Orion Office REIT Investment – This mistake fortunately resulted in a $900 gain, though it was more luck than skill that achieved this. Orion Office REIT, spun off from Realty Income in 2021, held suburban office properties deemed undesirable post-COVID. Here is the price history since the spinoff:
My initial thesis was that the market had overreacted, pricing these properties as distressed, even though they had modest leverage and cash reserves. I believed they could rebound, making them a bargain around $3.50–$4.00 per share.
I built a small position around $25,000 while waiting for additional funds but became increasingly uneasy about the investment. After discussing it with a knowledgeable real estate operator, I realized I had underestimated the challenges of Class-B/C office properties, which are largely obsolete and expensive to modernize. The short remaining lease terms further compounded the risks, and I concluded that this investment relied too heavily on speculation rather than solid fundamentals.
Ultimately, I sold the position, avoiding potential losses but recognizing my failure to assess the asset’s quality upfront. The key lesson: replacement cost is only a good metric if the asset is desirable, otherwise it is meaningless. While I still believe based on a gut feeling that this one will rebound, decisions based on gut feelings or speculative market conditions is gambling, and I am committed to avoiding such risks with your entrusted capital in the future.
Mistake #3: Medalist Diversified REIT – I initially believed Medalist would be my top investment of the year, as it appeared deeply undervalued with a clear catalyst to unlock value. This small, externally-managed REIT had been poorly run until an activist investor took control in mid-2023, aligning management’s incentives with shareholders. With a market cap of $15 million, it traded at 35-40% of its liquidation value, offering significant upside potential. Confident in the situation, I built a position, expecting to hold long-term.
Unfortunately, Medalist made a poor decision to fund new property acquisitions (a United Rentals and Buffalo Wild Wings) by issuing shares of common stock at a steep discount—around 35-40 cents on the dollar. While the properties themselves were strong, this move diluted shareholders by 15% and added only 5% value, effectively destroying 10% of value. It’s like owning a $100,000 collection of baseball cards and selling 15% of it for just $5,250 to purchase two new cards at fair value. While the collection’s total value increases to $105,250, your remaining stake is worth just $89,462.50, leading to a net loss in value.
After speaking with the CFO, I confirmed the facts and realized this growth strategy made little sense. Alternative funding methods, such as debt, preferred equity, or selling underperforming properties, would have been far better choices. Sadly, their plan was to continue this dilutive approach.
My mistake was not contacting management earlier to understand their strategy upfront, which would have revealed this issue before investing. Despite the flawed approach, we exited with an $11,500 gain in about a month due to a short-term price jump. However, I couldn’t justify holding long-term while facing ongoing dilution risks.
This experience reinforced the importance of early communication with management and thorough due diligence to avoid being blindsided by poor decisions. The lesson will certainly aid us on future investments.
These were the 3 biggest mistakes made in 2024. I’m writing them here as a way of telling on myself so that I don’t commit the same mistakes twice. But if I am silly enough to repeat them, we might want to start calling it a tradition instead of a failure!
Our focus in 2025
During 2024, our initial focus was on private real estate exclusively. I had stated in last year’s update that our investments would fall in 1 of 3 categories: control (we own a controlling stake), non-control (we don’t own a controlling stake and put trust in the main operator) and arbitrage (high-yield loans, and any kind of short-term “flip” opportunity).
None of our investments last year fell in the control bucket; they all fell either in the non-control or arbitrage bucket. There are a few opportunities I’m currently looking at that would fall in the control category, but as I’ll explain below, our focus will primarily be on non-control opportunities moving forward.
Ultimately, I am trying to intelligently allocate capital to the situations available that I believe will lead to the highest returns over time. Our investment opportunities should and do compete for our fund’s dollars. I look at it like a pro sports team where I am constantly trying to find better/stronger/faster players to replace the ones that are currently on the team. The more competition, the better our results should be, assuming my analysis of each opportunity is correct.
Logically, this means that the more opportunities I can look at, the greater our chances of achieving above-average returns become. The question then becomes, how do we increase the number of opportunities available to invest in?
About midway through 2024 I stumbled upon CPPTL (the JC Penney liquidating trust) and realized in about 30 seconds using napkin math that this was an absolute bargain. I did a thorough deep dive afterwards to ensure I wasn’t missing anything, but in the first 30 seconds of looking at this I could see the deal was as simple and straightforward as they come.
From here I had a lightbulb moment where I realized that the public markets offer us a few things the private markets do not:
1. Internal diversification – If we buy a single property on the private market, our success or failure is determined by that single deal. Whereas public REITs own many properties in many different markets. For instance, CPPTL currently owns 123 properties in over 30 states. So, while this investment makes up over 15% of our portfolio in terms of market value, it is indirectly spread out across 123 different properties across the country.
2. The rigors of reporting to the SEC – Since most public companies must report to the SEC, there is a level of disclosure that is usually much greater than what you would expect from a private company. This allows us to be much more selective in terms of the quality of situations we invest in.
3. The ability to achieve great returns while staying unlevered – I should note that this also applies to private real estate we invest in from a non-controlling standpoint. This allows us the best of both worlds where we can invest in something that is levered (leverage can increase returns), but not be at risk for anything beyond our invested amount if things go south.
4. Exaggerated price inefficiencies – REITs behave bond-like in that (as a whole) they react positively or negatively to bond yields. If you look at the charts below, the top chart is a popular real estate index fund that holds many public REITs, and the bottom chart is the 10-year Treasury yield. Both chart the prior year.
You’ll notice that when bond yields rise, REIT prices tend to fall, which can present buying opportunities for us when the market is pessimistic about interest rates.
I’ve also noticed that the smaller-cap REITs (~$1B and below) tend to be priced a lot less efficiently than their larger-cap brethren.
An example of this is Net Lease Office Properties (NLOP), a newly-formed REIT spun out of a much larger REIT. This was also a situation like I decribed earlier where the parent spun out unwanted office assets, and then the spinoff company announced a plan of liquidating these assets.
From the date of spinoff in early November 2023 through the end of 2023, this traded from $12-17/share, which was below half of its liquidation value using the most conservative of estimates for the properties they owned. And there was a clear catalyst to realize this value spread because they planned to liquidate their assets and are currently doing so. As you can see below, the market priced it higher over time, but there was about a 2-month window where this could be purchased for peanuts.
Sadly, I didn’t see this until it had drifted beyond where I was comfortable buying, but this is a good example of how the gap between price and intrinsic value can remain for a while on the smaller-cap REITs until the market prices it properly. Had the market cap been much higher, this price-value gap likely would have closed much faster than it did here.
In private real estate, these big inefficiencies are less common as the transactional friction slows things down. Interest rate news gets priced into the public markets immediately, but there is a lag time in the private markets since selling a property takes a lot longer than selling a stock. And unless a property owner is forced to sell, these big discounts rarely present themselves. Whereas someone who owns a public REIT can sell whenever they want instantaneously.
Warren Buffett popularized an analogy where he says the stock market is similar to owning a property with someone who is manic depressive. Every day this partner offers to either buy your stake or sell theirs to you. Some days they are euphoric and offer a ridiculously high price and other days they are depressed and offer a crazy low price, and your job is to either buy, sell, or do nothing depending on their offer to you. This is something the public REIT market offers that private markets do not.
For instance, On CPPTL – at $10.50 and below I’m a buyer, from $10.50 - $17 I’m a holder, and at $17 and up I’m a seller. Unless new information is released, this remains unchanged.
Hunting for these unique situations where something is clearly undervalued with a catalyst on the horizon to unlock that value is something new that I’ll be searching for. There are an abundance of REITs available and every now and then we should be able to find a situation like CPPTL where there is a clear mispricing that offers an asymmetric risk/reward scenario. By adding these kinds of opportunities to our available investing universe, it should allow us to get more selective, which will hopefully lead to better returns over time.
I should also note that I am not at all foregoing the chance to look at private real estate deals, I am just adding public REITs to our investing universe which will allow us to get pickier with what we choose to invest in.
We also will have a decent cash position (once a couple loans are paid back to us) that is approaching 30% of our total portfolio. While I don’t like idle cash earning Treasury rates, it feels like we are in a strange place with persistent inflation, high rates, a crazy overheated stock market, and a lot of looming loan maturities. There could be some great opportunities on the horizon for those that remain patient as I don’t think the party will go on much longer.
To touch on the loan maturities, this is something I had read many headlines about but never investigated myself. By looking at hundreds upon hundreds of REITs in the prior 6 months or so, I can confirm there is a wall of loan maturities coming due in the next couple years as the headlines have been saying. I don’t know what will happen, but a lot of these loans were originated during the zero-rate environment and the prospects of getting rates in the 6-7% range to replace 3-4% rates might lead to some trouble.
I don’t know when/if/how this will play out, but my gut feeling is that cash will be useful to us if there is some distress in the real estate market. During most of my career from when I started buying real estate in 2016 it has been a favorable environment for sellers with rates at all-time lows. The pendulum has swung back in favor of the buyer now and there will likely be some great opportunities available to those that have cash and are patient.
Reporting and K-1’s
I’ll send our 2024 P&L and balance sheet separately to everyone in the fund. Please let me know if you have any questions. I am always happy to jump on a call or meet in person to discuss in greater detail.
We have several external K-1’s we are waiting to receive which will then allow us to file our return and issue K-1’s to everyone. As mentioned in the past, we may have to file an extension depending on when these K-1’s are received by our fund. This is an element outside our control, but once we receive these I can turn around our return quickly and issue K-1’s to everyone.
As we approach the corporate and individual deadlines I will communicate if an extension will be needed or not. Please let me know if you have any questions on anything and be on the lookout for the mid-year update, which will be sent around mid-July.
Thank you all for partnering with me and allowing this fund to exist. I am extremely grateful for all of you and am excited about our prospects in 2025!
In Christ,
Will Harvey III
IMPORTANT: This communication is for informational purposes only and is intended solely for the general knowledge of the recipient. It does not constitute an offer to sell or a solicitation of an offer to buy any securities, nor shall any securities be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful. Any offering of securities will only be made pursuant to a confidential Private Placement Memorandum (PPM) and other definitive legal documents, which must be reviewed by the prospective investor.