CEO on Leadership: Gregory St. Clair, President and COO, KFG Investment Company

Spring 2014
Gregory St. Clair

Gregory St. Clair is president and chief operating officer (COO) of KFG Investment Company, a privately owned firm based in Encino, Calif., that is focused on the acquisition and repositioning of industrial and multifamily properties as well as on the ownership and entitlement of residential land and master-planned communities. KFG stands for the Keston Family Group; the company is a family office, business parlance for a firm that manages the assets (in this case, the real estate assets) of a single family. A 17-year veteran of the firm, St. Clair directs the acquisition, due diligence, financing, leasing and management of the company’s properties and is responsible for the performance and investment management of its real estate assets.

Development: What are your core areas of focus?

St. Clair: My focus is on every aspect of portfolio management, to allow us to achieve our targeted investment returns. Specifically, on the operations side I focus on retaining good tenants and replacing weaker ones. On the acquisition side, we are going in two directions: multifamily and industrial. For each, we are following an acquisition plan that will allow us to target properties within a niche where we can be competitive and achieve an acceptable investment yield.

Development: Over the next 18 months, what challenges/opportunities do you see for the industry?

St. Clair: On the opportunity front, we see a continuing strengthening of the rental markets in terms of rates, demand and tenant quality. Over the next 18 months, we expect a continuation of a favorable interest rate environment. Now is a good time to strengthen your operating cash flow and your rental stream. If you are a seller, now would be a good time to sell, because the capital available for commercial real estate investments is at an all-time high, which, when coupled with a low cost of capital and a scarcity of investment opportunities on the market, is driving prices higher and capitalization rates lower.

As for challenges, competition is fierce for buyers, and it is pushing yields lower and making it very difficult for the traditional buyer. We at KFG are traditional buyers, using both market rate debt and equity. It is hard for us to compete with institutional capital. The other challenge is that we are in a soft economic recovery that is uneven throughout property types and submarkets.

Development: Looking out three to five years, what do you see on the horizon that will impact the industry? What are you doing today to prepare?

St. Clair: Two things come to mind: inflation and a shift toward institutional ownership. On inflation, we see interest rates increasing because the Fed intervention will have to decrease at some point. You must counter that threat by locking in your debt, making sure you have fair market value options on your leases (leases that provide an extension option and enable ownership to adjust rents to fair market rates) and, for us, not pushing leverage too high. On shifts in ownership, there is a continuing concentration of institutional ownership. If you are going to compete on the acquisition front, you must have a good source of “dry powder,” and you need to keep and maintain solid contacts that will allow you to react quickly to niche plays.

Development: How has the industry changed during your career?

St. Clair: The biggest change is cap-ital. Back when I first got involved in real estate 30 years ago, capital sources were fairly easy to understand. Now, the volume of capital that is being raised is staggering. That is leading to different investment decisions by investors in the marketplace. So we must respond carefully and understand who we are willing to compete with. If a group has raised a tremendous amount of capital and needs to place it, and I am competing with them for a property, I am most likely not going to get it. So we need to be intelligent as to what we pursue and who we can compete against. We also need to develop our asset and acquisition strategies with that in mind.

Development: What is the most valuable lesson you have learned over the course of your career?

St. Clair: I’ve learned that real estate is a business of good, solid fundamentals. The “blocking and tackling” of real estate is creating a solid cash flow, growing that cash flow, minimizing the disruptions to the cash flow and managing your investments properly to meet the requirements of your equity. Those fundamentals don’t change.

Development: What are the advantages and disadvantages of a family business?

St. Clair: One advantage is that I have a single equity source. We have established plans, and if I find a property acquisition opportunity that meets our plans I can quickly move on it. In other environments, this can be much more cumbersome. Further, I do not have to raise capital. Yes, we want to invest and grow our portfolio, but we do not have costs accruing that will negatively impact our yields if we do not invest. I also have a long time horizon. I can purchase with an eye toward holding for 10 to 15 years to create a nice, stable portfolio. I don’t have to worry about coming up to the end of a fund and having a triggering event that forces a sale despite market conditions.

As for disadvantages, it is much harder for me to transition into another strategy or change focus. We have our strategy and we pursue it. If the market changes, it is harder to change course, and most likely we will go to the sidelines. In addition, since we do not have to place capital, it is harder to grow the portfolio at a fast pace. Most transactional people, myself included, want to “do deals.” However, due to the nature of our company, it is possible that we will miss out on some opportunities.

Development: How do your company’s strategies differ from those of an institutional investor?

St. Clair: An institutional investor has to place capital, whereas we can wait for the right opportunity. Another significant difference is reporting. I obviously have to report to our owner, but [that reporting process] is streamlined. I do not have appraisal requirements or investors looking for quarterly and annual results. And compared to the institutional investor, I can run a very streamlined shop and do a little of everything: I can move between meetings with tenants, looking at maintenance, chasing potential acquisitions and negotiating joint venture investment opportunities. It is a lot of fun.