Question-and-Answer Session
Operator
Our first question comes from Paul E. Adornato – BMO Capital Markets Corp.
Paul E. Adornato – BMO Capital Markets Corp.
Everyone is talking about the lack of transactions out there and anything that’s related to transaction income is kind of at risk these days. I was wondering if you could talk about the IREX JV and how the 1031 market seems to be performing in real time?
Mark E. Zalatoris
The 1031 market probably has slowed down a bit as all transactions have slowed down a bit. The 1031 investors are reliant upon buyers for their assets and financing to be available for their buyers so there has been a little bit of a slowdown that has been experienced in the overall market.
That being said, our partner Inland Real Estate Exchange Corporation has really full expectations of achieving the same level of sales for this year as they did last year and in many ways the reason is they’re taking market share away from their competitors who have fallen by the wayside. So the smaller universe of transactions that is occurring is being more directed to IREX than to anywhere else.
They’re also experiencing an unusual phenomenon in that they’re getting all-cash buyers coming in. So it’s not even 1031 exchange investors but buyers that want to put their cash into real estate assets, hard assets rather than into equity markets believe it or not.
We do expect a temporary slowdown and when the credit markets start loosening up as we’re experiencing this in the last week or so we’ve seen rates come down substantially, the LIBOR rate come down to more of a traditional level, etc. and some financing transactions getting done. We think there’ll be more sales of the properties that will create the demand for 1031 investments. We also think that given the new Administration that’s coming in, there’s a greater likelihood of an increase in capital gains taxes which should spur on some more sales activity.
Paul E. Adornato – BMO Capital Markets Corp.
A related question is that given the increase in the cost of capital, I was wondering if you could talk a little bit about the allocation of precious capital to the IREX JV versus alternative uses vis-à-vis your own balance sheet?
Mark E. Zalatoris
The IREX JV if you look at it on a true return basis due to the revolving nature of the investment provides us with I think our overall best return on our capital. We put it out into a property, the property that we buy gives us a good current return that covers our cost of the capital be it our line of credit or the secured financing that’s put on the property before it’s sold so it’s accretive to us, and then we receive our capital back and we can revolve it into a new property.
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