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London Roundtable (Dec. 6th): How Challenging Markets Drive New Exit Strategies

Author:
Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting
cdlloyd@blueyonder.co.uk

The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’ Opus Connect Member.

The second Opus Connect London event was kindly hosted by Hogan Lovell on Wednesday 6th December at their City offices. Tom Whelan – Head of the Private Equity practice – welcomed more than thirty family office and private equity delegates and introduced the discussion topic:

‘How Challenging Markets Drive New Exit Strategies’

Many delegates agreed that the length of the current bull-market has made it increasingly difficult to find attractively valued opportunities. They noted that the five year private equity deals, which were common prior to 2008, are now typically seven or ten years in duration due to the slower turn-around seen in the new low interest rate/low growth environment.

A major topic of discussion was real estate. New York and London were both regarded as expensive, although a number of members mentioned Chinese interest as a result of the decline in the value of sterling. Rental yield remains the key factor with 5% or higher opportunities still available outside the prime locations.

The discussion then switched to the technology sector. Several members made comparisons with 1999, however a number of family offices still see value. The smaller family office appears to be in a favourable position since they are seldom forced to invest capital in the same manner as the giant VC operators. Relieved of the pressure to invest, the family office can take its time identifying better value propositions and by making direct investments. The general view was that many recent VC and PE fund launches have been obliged to pay hefty multiples of earnings in order to allocate their capital. Investors in these vehicles may have acted in haste, they may repent at leisure.

The large scale capital in-flows, which have been dominated by the giant VC and PE firms, has created a lively secondary market in its wake. Several members suggested that, whilst the term structure of deals has increased the ability to exit via the secondary market has redressed the balance to some extent.

Inevitably the discussion moved on to the bubble in digital currencies. There was general agreement that the bubble will burst at some point but a similarly contrary consensus about the future of blockchain – distributed ledger – technology. As one member put it, ‘The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’

Real Estate Chapter November Panel

Author:

Paul Monsen (Opus Connect Member)
Director – Real Estate Lending at Maxim Commercial Capital

Opus Connect – Investing In Multifamily.
In Mid-November, Opus Connect and Sklar Kirsh hosted a panel discussion that consisted of Neil Schimmel (President & CEO, IMG), Max Sharkansky (Managing Partner, Trion Properties), Henry Manoucheri (Chairman & CEO, Universe Holdings), Jerry Fink (Managing Partner, The Bascom Group), and Adam Peterson (First Vice President, CBRE), and was moderated by George Lintz (President, Bellaire Partners, LLC.).

The subject was investing in multifamily real estate in Los Angeles and the greater United States. Topics included valuation metrics for the current cycle, untapped West Coast markets, LP equity structures, and how to invest in a late-cycle market.

Intro
Adam Peterson kicked off the panel with a boots-on-the-ground perspective on why Los Angeles continues to be a premier investment market. He noted that there are still several attractive markets and asset types, including Long Beach, Highland Park, and rent controlled properties. Adam hedged his advice with a warning about overbid markets, particularly West LA/Santa Monica. He also noted that rent control tenants are getting smarter.

Acquisition Metrics
The mention of West LA quickly brought up the topic of cap rates. General consensus held that tier one market cap rates range from 3-5% and secondary markets providing a slight premium of 4-5.75%, with overheated markets commanding sub-3% rates. Continued cap rate compression has forced investors to rely on other investment metrics, particularly dollars/unit, gross rent multiples (GRM), and asset quality. Cap rates are still important, particularly for exit underwriting. Investors are underwriting to a 4.5-5.5% exit cap for Tier 1 properties, with another 100 basis points added for secondary markets.
Universe Holdings is focused on SoCal properties in the $185k – $325k/door range. IMG likes partially renovated buildings in B+ to A markets that they can bring to market standard. The Bascom Group won’t buy anything with >15GRM.

Operations/Rents
Rent/sf can be misleading in multifamily. One panelist explained that he checks Rent/SF but always focuses on the gross number. Very few renters are doing the math to figure out rent/sf. The average renter is focused on the gross dollar impact on their bank account. Mr. Fink noted that any units priced below $2k/door in LA will rent immediately, regardless of size.

Investor Structures & Returns. 
Panelists were all seeing LPs demand preferred returns of 6-9%, with a 75% (LP) / 25% ( GP) split thereafter, avoiding waterfalls if possible. Bascom detailed another popular structure: 10% pref, 20% promote to a 15% total return, then a 30% promote thereafter.

Trion’s LPs are focused on the deal’s return on cost, and want a 2x multiple on their equity, with a high teens IRR over a 3-5-year period. Further, investors are deeply scrutinizing all underwriting assumptions.
However, the panel admitted that those return profiles are increasingly difficult to achieve. Typical deals today provide a 1.6-1.8X return on equity, an IRR from 12-16%, and yearly cash on cash returns of 6.5%-8%. Mr. Manoucheri pointed out that larger institutions and foreign companies are squeezing out local investors in primary markets, as they are willing to accept down to an 11% IRR.

Investment and Growth Philosophy
Each panelist’s company is continually torn between two competing goals: 1) beat the market and 2) scale. Option 1 is increasingly difficult because competitors have flooded the market while option 2 is beneficial to the company but brings lower risk-adjusted returns. So, each panelist tries to find a niche, i.e. Trion’s focus on tired assets, the East Bay Portland, etc., while IMG needs to have “boots on the ground” experience and fosters local relationships.

2008 Recession & The Next
Mark Weinstein, Founder and President of MJW Investments, added to the panel’s insights by noting that prudent use of leverage is vital at this point in the cycle, with an eye towards long-term holds.
Adam Peterson further pointed out that while LA as avoided the worst of the last downturn, all panelists are actively avoiding C properties and tertiary markets at this point.

Additional Takeaways.
Don’t buy from smart brokers for smaller investors.

Buying off market deals can be more trouble than its worth because they hear 3% cap rates and think that’s what their property should demand.

Trion Properties is bullish on digitizing property & asset management. 90% of their renters pay online.

At this point in the cycle “you don’t need to make money, you need to not lose money.”

Real Estate Chapter May Roundtable

Rebecca Pedooem
Account Manager
Opus Connect
Rebecca@opusconnect.com

Moderator: Robert Clippinger, President at Clippinger Investment Properties

Summary:

Developers can agree that mixed use projects can be challenging in the simplest of circumstances. This roundtable will focus on the following:

Why mixed use?
Why does it work?
When does it not work? Socio/Economic?
Financing Mixed Use
How do retail/restaurant/residents cohabitate?
Parking Issues?
Picking the right retail/restaurant
• Managing Mixed Use
A good, well planned mixed-use project can be beneficial for everyone involved!

From the city, developers, lenders, residents, and retailers, everyone can profit. In this month’s discussion, we heard from the expert Bob Clippinger. (Bio attached)

So why do mixed use projects work? Mixed use projects can attract better tenants, lenders and retailers. Landlords can charge higher rents from tenants and tenants can benefit from the wide range of amenities they can be offered (i.e, coffee shop/mini mart/restaurant). Mixed use projects can also be beneficial to the city because they can create a more “neighborhood feel”- food brings everyone together!

In fact, mixed use developments can alleviate many service needs by providing parking options, convenient retail, accessible restaurants, and residential living quarters all throughout a walkable area. Walkability (walk scores) are popular once again – people prefer this over driving/commuting to different places so from an urban planning perspective, they offer efficiency and a decrease in traffic congestion.

When deciding on developing a mixed-use project, there are some consideration to keep in mind from financing to retail and resident cohabitation. Lender relationships are important because mixed use projects are complicated. Most commonly the 80/20 Rule apply but things can get tricky if you are not properly prepared. Pre-leasing can make the lending process easier, however, if that becomes an issue, there’s always other kinds of loans such as mezzanine.

Can we all get along?! That is, how can your residents and retailers cohabitate? Devil is in the details. According to experts, the best way is to plan ahead and define the terms of the lease clearly to all parties. Make sure your tenants are aware of where they are living. Smells and noises can be an issue so a developer can bypass this matter by making sure not to take on any Ethnic foods as a tenant and ensure your ventilation system works! Hiring an acoustics specialist can also save you a lot of headaches down the line. As far as your retailers, they can’t complain if you pay for cleaning or CAM, you’re getting 90 units of residents, and there’s nothing like foot traffic for any retail business.

For more information regarding this topic or Opus Connect, contact Rebecca Pedooem at Rebecca@opusconnect.com