In The Headlines

Is Crowdfunding the House Flipper’s Dream Come True?

House flippers and property developers are increasingly crowdfunding—tapping the virtual wallets of anonymous internet backers on platforms such as RealtyShares, LendingHome, PeerStreet, and Patch of Land. For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they are finding quick financing can be easier to get online than from banks. That has contributed to an increase in home flipping. In the second quarter, 39,775 investors bought and sold at least one house, the most since 2007, according to ATTOM Data Solutions.

The crowdfunding sites are part of the multibillion-dollar ecosystem of marketplace lenders, like LendingClub Corp. and Prosper Marketplace Inc., that match users who need money with people who want to provide it for anything from debt consolidation to elective medical procedures. That business has not always run smoothly. LendingClub is going through a rough stretch after years of rapid growth. In May, its founder and chief executive officer resigned amid an internal probe into a botched loan sale, sending LendingClub’s shares tumbling. So far, there have been few defaults in real estate crowdfunding deals. When they happen, the platforms say that they will pay investors the proceeds from property sales.

The business has other potential pitfalls. When it comes to real estate, faster is not always better. Wall Street’s home-mortgage machine of the mid-2000s valued speed over accuracy, with disastrous results, though most crowdfunding sites cater to investors and not homebuyers. Also, clicking for capital can be exploited by fraudsters who may not be who they say they are, according to Sara Hanks, co-founder and CEO of CrowdCheck, which provides due-diligence services for online investors. “We’ve seen some things where the entity that’s supposed to own the property doesn’t actually own it,” she said.

keep a lid on fraud, PeerStreet does not originate loans like most of the other platforms. Instead, it created a secondary market. It buys high-interest-rate loans that are made to real estate investors and then spreads the risk among individuals who purchase pieces of them online. “If you’re originating and selling, you’re just trying to get as much volume as you can,” said Google Inc. alum Brett Crosby, who co-created PeerStreet and is now Chief Operating Officer. “In order to get more borrowers in the door, you start to drop underwriting guidelines.” The ease of fundraising through these nontraditional lenders could be a warning sign, according to Erik Gordon, a law professor at the University of Michigan in Ann Arbor. “Whenever you see a big difference between the terms on which you can raise money in one market versus another market, something is wrong in at least one of those markets,” Gordon said. “It usually is the market with the least-experienced players, and they usually end up wishing they hadn’t played.”

The companies are in the early stages. Patch of Land said it has originated more than $180 million in loans, RealtyShares reports raising more than $200 million for real estate deals, and PeerStreet said it has funded more than $100 million. LendingHome won’t say how much it has generated—the company started crowdfunding only this year. Those totals are peanuts compared to platforms like Lending Club. Jeff Bullian, a Boston-based consultant, has invested in about 30 deals on RealtyShares, and in a handful of others on websites such as Patch of Land. So far, only one deal has gone bad, he said. In that instance, the platform, which Bullian declined to identify, went to bat for investors so everyone could get their money back along with a small return. Bullian said he contributes an average of $10,000 in each deal for returns of about 10% to 20%, similar to what he was getting from a marketplace lender. “I really like the risk profile of real estate deals compared with some other investments because they’re secured,” Bullian said. “If something goes bad, you have the asset to fall back on.”

U.S. Securities and Exchange Commission regulations require investors to be accredited, or meet conditions such as an annual income of at least $200,000 or a net worth of $1 million. Individuals generally put in a minimum of $1,000 to $5,000 and are promised interest-only payments each month, with the rest of their money back at the end of the loan term. Some enroll in automatic options that invest in a variety of deals for diversification.

Through RealtyShares, investors can raise different kinds of debt and equity. The company verifies and underwrites every offering, according to CEO Nav Athwal. Of the prospective projects brought to the company, only about 3% are selected to be listed, he said. LendingHome keeps loans in a bankruptcy-remote entity so the debt and repayment streams are insulated from anything that may happen to the firm. The company had previously only offered loans to institutional investors, according to CEO Matt Humphries. Patch of Land also keeps loans in a bankruptcy-remote entity. The company generally requires borrowers to provide personal guarantees and to put at least 20% of their own money into deals, according to AdaPia d’Errico, the Chief Marketing Officer. These new marketplace lenders for real estate provide speed and flexibility, but many in the industry, remembering what happened in 2008, worry that speed and property loans may not mix.

Citations

1. http://bloom.bg/2ctEZLC – Bloomberg
2. http://cnb.cx/29Y9cmP – CNBC

To Be More Relevant, Cracker Barrel Mixes the Old and the New

You might be surprised to find fashion-forward apparel and wooden platters hand carved by artisans in the Philippines next to Yankee Candles and Christmas decorations at Cracker Barrel Old Country Stores. But the restaurant chain known for Southern food and homey gift shops filled with trinkets has slowly expanded its retail mix to lure a new, much younger demographic. That is how trendy T-shirts and vinyl records landed in stores known better for rocking chairs and quilts.

In an earnings call earlier this month, Cracker Barrel CEO Sandra Cochran said the company plans to broaden its relevance to Millennials and multicultural communities through “enhanced marketing messaging, menu innovation and new retail merchandise.” It is quite a change for the 641-unit chain started 47 years ago as a single store on Highway 109 in Lebanon, TN.

Cracker Barrel’s attempt to reinvigorate its brand is visible across departments, from its use of social media platform Snapchat for marketing purposes to exclusive music releases with hot pop groups like Needtobreathe. Lately, younger shoppers have been drawn to the vintage soda wall with options that include Southern soft drink brand Cheerwine and Ale-8-One, artisan home decor, stained-glass lamps, retro T-shirts, and vintage candies like Necco Wafers and Double Bubble. “We have made a concerted effort to attract a younger generation,” says Laura Daily, Cracker Barrel’s Senior Vice President of retail. “It’s a smart move now that the Millennial generation is solidly in their 20s and 30s and they’ve started their families and we’re a name they’ve trusted.”

Cracker Barrel’s music program has been a success for the company. It includes exclusive releases and online music videos from Country Music Hall of Famers to rock bands and Christian music stars sold at its retail stores. Cracker Barrel recently added vinyl to its collection, and the company also partners with music artists for exclusive retail collections, such as the new “Rockin’ R By Reba” with Reba McEntire. Items geared toward Millennials fill the shelves of a mock-up Cracker Barrel store in the company’s retail development center at its Lebanon headquarters Sept. 15, 2016. “Music is a big part of our brand,” Daily said. The tricky part of the effort is attracting younger customers without putting off the older ones. “You don’t want to alienate the guests who love us,” Daily says.

The move to attract Millennials comes as Cracker Barrel faces the same dilemmas as many other traditional restaurant chains: a growing consumer preference for more casual dining concepts. Indeed, Cracker Barrel debuted Holler & Dash Biscuit House earlier this year in hopes of capturing sales in the booming fast-casual segment. Fast-casual eateries typically offer higher quality food than fast-food restaurants, and customers usually order at a counter. The segment has grown an average of 7% to 9% every year since 2007, far outpacing growth in the overall restaurant industry, according to market research experts in consumer shopping trends at NDP Group.

NDP Group restaurant industry analyst Bonnie Riggs said Millennials, those between the ages of 19 and 35 according to Pew Research Center, are enticed by fast-casual restaurants such as Panera Bread and Taziki’s Mediterranean Cafe because they want quality food prepared with fresh ingredients offered at a low price point. “Middle America just can’t afford to go to restaurants on a regular basis, and when the price-value relationship gets out of whack, they retrench even more and that’s what we’re seeing in the overall restaurant industry,” Riggs said.

Cracker Barrel reported revenue rose 2.5% to $2.91 billion for the fiscal year ended July 29, 2016, but it plans to slow menu price increases in fiscal 2017, citing a “challenging period in the restaurant and retail industry” as consumers become more selective.

Citations

1. http://www.usatoday.com/story/money/business/2016/09/23/cracker-barrel-goes-trendy-lure-millennials/90886796/ – USA Today
2. http://www.businessinsider.com/cracker-barrel-brand-revamp-2016-3 – Business Insider

The Good News Is . . .

• The number of Americans filing for unemployment benefits unexpectedly fell to a two-month low for the week ended Sept. 17, pointing to labor market strength. Initial claims for state unemployment benefits declined 8,000 to a seasonally adjusted 252,000, the lowest level since mid-July according to the Labor Department. Claims for the prior week were unrevised. It was the 81st consecutive week that claims remained below the 300,000 threshold, which is associated with robust labor market conditions.

• Adobe Systems, Inc., a provider of software for creating digital media, reported earnings of $0.75 per share, an increase of 38.9% over year-earlier earnings of $0.54 per share. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $1.5 billion, a 20.2% increase. Management attributed the results to the continued strength of its Creative Cloud subscriptions.

• Renesas Electronics, a Japanese microchip has made a deal to buy Intersil, a California-based chip maker, for $3.2 billion, or $22.50 per share. The microchip industry is experiencing a wave of consolidation, as manufacturers seek to build scale and reduce costs. Renesas and Intersil said in a joint news release that their businesses, which are focused on different kinds of chips, would complement each other. Renesas makes microcontrollers, or chips that work like tiny computers and are embedded in products as varied as televisions and cars, where they control functions like power steering and windshield wipers. Many of its customers are in the automobile industry. Intersil specializes in chips that manage the power supply in electronic devices, and in so-called analog chips, which capture information from things like light and sound and turn them into digital signals.

Citations

1. http://reut.rs/2coigxn – Reuters
2. http://cnb.cx/1gct3xa – CNBC
3. http://adobe.ly/2cv7ZEm – Adobe Systems, Inc.
4. http://nyti.ms/2cVykwU – NY Times Dealbook

Planning Tips

Guide for How to Select a Smart Beta Mutual Fund

The number of smart beta mutual funds has proliferated due to aggressive marketing by the investment industry. These mutual funds offer a wide range of options for portfolio diversification and opportunistic investing. These funds also present a variety of challenges to investors including complex strategies, generally higher costs of ownership and dilution of value of specific factors over time. For these reasons, you should use due diligence processes to determine which funds that have the potential to outperform similar investment vehicles while meeting your investment objectives and risk tolerance levels. Be sure to consult with your financial advisor to determine if these investments are appropriate for your situation.

Understand what smart beta funds are – Smart beta strategies are based on identifying historic anomalies, also referred to as factors, which have resulted in higher-than-market returns at various points in the past. Investors seeking to invest in these funds have a wide variety of choices, ranging from relatively simple strategies based on a single factor such as dividend yields to highly complex funds managed using multiple factors.

Know the strategy – Developing an understanding of the underlying strategy of a smart beta mutual fund can facilitate comparisons of relative performance versus other funds in the same category, an action that cannot be taken if the fund’s strategy is unclear. For example, a smart beta fund using a strategy based on high dividend yields paid by companies in the Standard & Poor’s 500 Index can be compared against the performance of indexed funds using similar strategies to determine the optimal choice in the investment category. Understanding the fund’s strategy can also prevent overexposure to specific market conditions within your investment portfolio.

Determine the fund’s expenses – The expense ratios of smart beta funds are generally lower than funds using active management strategies and higher than passively managed indexed funds. Before selecting a specific fund for purchase, compare expense ratios and trading costs against similar smart beta funds and indexed funds. Generally speaking, expenses incurred by smart beta funds are typically higher than indexed funds due to marketing costs and higher turnover rates. Higher expenses versus otherwise similar funds can substantially reduce relative performance over the long term. Additionally, fund managers may be willing to accept more portfolio risk in hopes of compensating for higher costs.

Ignore backtested performance – To determine the returns generated by specific factors, fund sponsors backtest historic performance over time periods when those factors were present. While these backtesting processes serve as the foundation of smart beta funds, the sample size of these tests can be in the low single digits, which opens the possibility that returns are based on outside influences such as strong market performance rather than the specific factors being tested. Despite this ambiguity, however, backtested results are commonly used in sales materials presented to investors. Instead, using actual trading data can reveal a fund’s returns in real time for a true representation of its performance.

Check the number of funds using the same strategy – One of the biggest challenges of trading based on share price anomalies is the inherent advantages become increasingly diluted as more investors discover them. This occurs as the demand resulting from multiple funds basing their stock purchases on similar factors pushes share values in the specific category higher, thus eliminating the advantages of buying stocks that are supposedly undervalued or undiscovered. This mechanism works against all smart beta funds to varying degrees, but categories with low liquidity that have appreciated in price are the most vulnerable. To avoid these issues, you may want to consider categories with ample liquidity or funds that are significantly down from recent highs.

Citations

1. http://bit.ly/2cZMJWf – Kiplinger
2. http://cnb.cx/1TB3Vyk – CNBC
3. http://bit.ly/2cVLXfz – Investopedia
4. http://bit.ly/2cRq0e8 – Bankrate.com
5. http://bit.ly/2dssaCV – BlackrockBlog.com