So here are my opinions on TREF after looking at the audited 1k. For the record, I'm a former auditor of PwC and have both audited and prepared financials for investment banks and hedge funds.
Is Jay running a scam.
No.
Is Jay running a finesse job.
Yes. But not in the way that everyone thinks.
Firstly, because
@Booker T Garvey is posting bits of information from legal financial documents, information that he doesn't even understand, I would disregard anything that he says on the subject
Secondly, from doing a bit of research the past hour, I've noticed a few criticisms levied against TREF from different places that I would like to address. Many of these criticisms I think contributed to the SEC investigation by "whistleblowers". I am going to address three of these specifically from this MinorityReport TV Show website found here:
https://www.minorityreporttvshow.com/single-post/tulsarealestatefund
3 Criticisms
1. You can't withdraw or sell your shares for 1 year. It is not out of the ordinary for funds to have what's called a "lock-up period". A lock-up period, is a period where investors in a fund can not redeem their positions until after a certain period of time has elapsed. This is typically due to the nature of the underlying investments and the degree to which those investments are "liquid". Typically, in order for a fund to redeem an investor's position, they have to sell off portions of their underlying investments. If TREF was a fund where the underlying investments were shares of stocks, the fund would have to sell off some shares so they can pay back an individual investor. However, since TREF is a real estate fund where the underlying investment is real estate, real estate is not liquid, so you can't just sell off a piece of real estate at the drop of a dime when an investor wants to redeem. The lock-up period of a year gives the fund time to sell off investments in the instance investors want to redeem. If you want to learn more about lock-up periods, go here: What Is a Lock-Up Period?
2. You also can not receive any information about investment properties prior to investing.
This is an investment fund managed by a fund manager. It is the manager that makes the investment decisions guided by the investment strategy the fund manager set at the outset of the fund. An investor in the fund does not get to review investments before the fund manager enters into them. THIS. HAPPENS. NOWHERE. Investors buy into funds based off the funds strategy. Jay's strategy was to "buy back the block". So investors bought into the fund based off that strategy. Investors then pay the fund manager to make the investment decisions as long as those decisions are guided by the strategy. If Jay is making investment decisions that are outside of his "buy back the block" strategy, then his investors can challenge his decisions. From what I've seen, he hasn't done that yet.
3. The founders also made no investments of their own prior to creating the fund; they are gambling with other people's money. Some fund managers have positions within the funds they manage, some don't. Finance is guided by what's called OTM "Other People's Money". That's the beauty. That you get to use other people's money to make money without having to put up your own. There is nothing special about TREF in that regard.
All of these criticism are actually non-issues that any investor that had a modicum of experience would already know. However, since Jay's fund is funded by a novice investing demographic, in their ignorance, they are making much ado about nothing, or at least, levying criticisms, where there is nothing worthy of critique.
Let's get to the actual fund.
@Booker T Garvey is keep posting this language from TREF financial documents.
Stop it. the opening statement in this LEGAL document is:
"We are an emerging growth company organized in July 2016 and are currently operating at a loss. There is no guarantee we will ever generate a profit"
He thinks it means investors will not get their money back or at least not see a return on their original investment. If you are not familiar with financial statements or financial concepts in general, you may think the same thing. However, that's not what it means.
Profit aka Profit & Loss (PnL) relates to the Income Statement (IS). It relates to the operating income and operating expenses incurred by the fund. In fact, profit and loss is calculated from subtracting income from expenses (Inc - Exp = PnL)
This is not the same thing as the return on investment (ROI). In the case of real estate funds like TREF, the return will be the gain in appreciation of the underlying real estate property. Gain in appreciation will be presented on the funds Balance Sheet (BS) not the Income Statement (IS).
This is what Investopedia has to say about real estate funds:
"Real estate funds gain value mostly through appreciation and generally do not provide short-term income to investors the same way that REITs might."
REIT vs. Real Estate Fund: What's the Difference?
What this means is that real estate funds typically do not generate operating income. However, there are still expenses to operating the fund. Expenses like paying the people that manage the fund, paying 3rd party services that help operate the fund, or general operating cost that cover everything from administration to marketing.
What this looks like on the Income Statement is this -
(Inc - Exp = PnL)
Income $0 <----- Because real estate funds typically don't generate income
Expenses
Mgt. Fee ($100)
Marketing ($100)
($0 -$100 -$100) = ($200)
Operating Loss of ($200)
So when the legal financial language says:
"We are an emerging growth company organized in July 2016 and are currently operating at a loss. There is no guarantee we will ever generate a profit"
First of all, this is an income statement issue. It means, on the income statement, income may not be reported (because of the nature of the industry) but we will regularly accrue expenses (which are the expenses needed to run the fund) that of which will net an operating loss and thus no profit may never be generated.
LET ME SAY THIS AGAIN, THIS IS NOT THE SAME AS THE APPRECIATION OR GAIN ON INVESTMENT.
Having audited many funds, operating losses are the norm 50% of the time. It is not the determinant of the gain on investments. However, it plays a role in determining the earnings an individual investor will receive once they redeem.
This role could be illustrated by the formula that is used to actually value a fund or calculate the NAV (net asset value) as it's called.
NAV = Beginning NAV + Beginning Capital Activity (Subscriptions/Redemptions) + PnL + Ending Capital Activity (Subscriptions/Contributions) = Ending NAV
To illustrate with numbers:
A new fund will have no beginning NAV, so that would be $0.
Beg. Capital Activity (New Subscriptions into the fund) = $10 million
PnL for the year = $100,000
Ending Capital Activity (None, since there is a lock up period or a period where investors can't redeem their positions).
So the formula is...
Beg Nav Subscriptions PnL Withdrawals End. Nav
$0 + $10,000,0000 + $100,000 + $0 = $10,100,0000
The ending NAV is the value of the fund.
NAVs are typically calculated on a month to month basis. So ending NAV of month 1 becomes the beginning NAV of month 2.
Let's make an assumption that there is a subscription into the fund every month of $1 million and an
operating loss of $100,000.
Beg Nav Subscriptions PnL Withdrawals End Nav
$0 + $10,000,000 + $100,000 + $0 = $10,100,000 January
$10,100,000 + $1,000,000 + ($100,000) + $0 = $11,000,000 February
$11,000,000 + $1,000,000 + ($100,000) + $0 = $11,900,000 March
$11,900,000 + $1,000,000 + ($100,000) + $0 = $12,800,000 April
YOU CAN CONTINUE TO SUSTAIN AN OPERATING LOSS AND NOT GENERATE PROFIT, IT DOES NOT MEAN THE VALUE OF THE FUND WILL NOT GROW.
The kicker about the above calculation, is that the assumption is not taking into consideration real estate appreciation. This is a real estate fund and the above calculation is just the principal amount.
Let's say in April, we do an appraisal on the $12.8 million portfolio and we see that it is now worth $15.8 million. If we sold the real estate in April, we will have crystallized a gain on our real estate of 3 million which is the return on the original principal.
So now our portfolio is worth $15,800,000 even after sustaining
operating losses.
Now, lets say instead of incurring a $100,000 loss, we incurred a $100,000 profit February - April.
The value of the fund will be $15,800,000 + $300,000 = $16,100,000.
So, the ability to never generate a profit doesn't mean the value of your fund won't grow and that investors won't receive a return.
However, it does mean the loss will cut into the earnings the investors will receive otherwise.
Now that posters can understand that you can "never generate a profit" and still generate a considerable return on investment through appreciation, because those are, in fact, two different things, and operate on two different financial statements, now I'm going to talk about Jay's specific financials.
To be continued........
