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Bursting at the Seams

May 2021 Insight

On Saturday (the 29th) it hit me that I hadn’t started working on the May Altus Insight yet, at least a good ten days later in the month from when the process normally starts. And on the first weekend of summer with the kids just having ended school to boot. The reality is that the Insight had been overlooked due to a great problem: a crush of Altus pipeline activity. But this didn’t reduce the panic of needing to come up with a topic and write an article in such a compressed period of time. Chad proposed the idea of writing about our pipeline as the Insight itself. While we send out an activity overview each month on the 15th in our Mid-Month report, we rarely discuss what we are working on in any depth or with any level of explanation as to why we have chosen to work on said opportunities. Chad’s idea was a good one, and so I will give it a shot.

Altus’s Pipeline has never been so full. One might think this is due to the economic recovery. While possibly true, in reality, all the opportunities we are working on were months and months in the making, and all of them resulting from developing relationships within the industry. The following are in calendar order of purchase/kickoff:

Gateway Plaza, Sacramento- Retail Center: We first made an offer on this property over a year ago. The property is a surface retail center where this property (and several others) were passed to the children of the original investor after his death. As often (and unfortunately) happens, the children couldn’t get on the same page and an attorney was brought in to run the process. During this time period, and then exacerbated by the pandemic, the property was run very, very poorly. It wasn’t until other offers were accepted and then backed out of contract that the seller eventually came back to us in January of this year.

  • Scheduled Closing: End of June 2021
  • Structure: Multiple of our investors have 1031s they have asked us to place for them. Two of those will be investing in this opportunity. The remaining funds will come into a new limited partnership with the three entities being managed by Altus in a Tenants-in-Common (TIC) structure, which is something we have done on many occasions in the past.
  • Why we like it: In general, I am far more bullish on retail than most in the real estate world. I am aware of the Amazonification that is occurring and that the retail industry is rapidly changing. But I’m also confident that we are nowhere near being able to get a haircut or pick up dry cleaning at Amazon.com. Well located serviced based retail will have a place in our economy for many years to come. Additionally, and maybe more importantly in the short run, market valuations reflect investors retail and pandemic fears. Market cap rates on a center like this are around 6.5%, versus 4 – 4.5% for multifamily in the same area. With available interest rates being only marginally higher for retail loans than multifamily loans, that means the cash-on-cash return that can be produced is considerably higher currently for retail than many other of the real estate food groups. This property is very well located (1 mile household income over $90,000/year) and because of the messiness with the existing ownership and management our stabilized cap rate should be considerably higher than the market rate. The structure put in place for the investors provides a 7.5% preferred cash flow, which should be achievable right out of the gate.
  • Project Strategy: The priority upon taking over ownership is cleaning up tenant ledgers and getting everyone on the same page in terms of NNNs and pay expectations moving forward. We expect this process to take 6 – 12 months. We are obtaining 10-year fixed rate debt at 4.25% from a regional bank, which allows us considerable flexibility moving forward. Do we sell and capture the upside resulting in really healthy IRRs? Do we hold longer term and enjoy the cash flow with the security of well-located property? Options are plentiful. As is our normal practice, we modeled a five-year ownership period which results in investor returns starting at a 7.5%/year yield and moving upward over the ownership period with an expected ~14% five-year IRR. Our friends and family network of investors will be receiving information on the opportunity in the first week of June.

AE HGF Liquidity Fund: For several years we have been working on ways to be able to offer an investment opportunity with true liquidity. While our real estate and debt opportunities have defined ownership and liquidation periods, we have not been able to offer anything that could approximate, or at least come reasonably close to, cash reserves. During that same time period we have been building our expertise and relationships in the debt markets. Our attorney is currently reviewing and verifying the structure, but we believe we have been able to create high levels of liquidity through a debt backed open ended fund.

  • Scheduled Closing: End of June 2021. This is the initial closing only. As an open-ended fund there will be monthly opportunities for investors to redeem their interest into cash and corresponding opportunities for new investors to enter the fund. I don’t view this as an investment vehicle to replace existing assets or strategies, but rather a place to park liquidity and earn at least a meaningful yield until the money is needed.
  • Structure: An open-ended fund using low leverage first position deeds of trust as security, then further strengthened with the addition of the security of cash reserves and substantial junior co-investment. The fund will offer both Preferred and Common units, with only the Preferred interests having liquidity rights.
  • Why we like it: Most of us have cash reserves sitting in the bank earning a pittance, if earning anything at all. Speaking from my own experience and from many within our investor network, our “liquidity” is not needed in the matter of a days, or really even weeks, but may be needed a month or two in the future. Besides holding cash (less than .5% returns and limited FDIC insurance, or in the case of CDs low returns and penalties for early withdrawals), other options to maintain relative liquidity are to own treasuries (<2% yields and super volatile over the past year), securities (very little yield, volatility), or currency/cryptos (no yield, high volatility). The Preferred returns offered are substantially higher than yields produced by cash, while still providing 30-day liquidity (subject to some limitations of course).
  • Project Strategy: Cash inserted into the Fund is required to be raised in an 80/20 allocation between Preferred and Common members. The Sponsors will have Founder units. Common and Founder units, in addition with all direct and management costs of the Fund, are first lost to protect the Preferred Units and the defined Preferred returns. The initial cash infusion will be used to purchase a loan portfolio with a combined LTV below 35% LTV, providing less than 30% LTV exposure to the Preferred Members once the additional security of the Common Member investment is applied. The Fund will be open ended with undefined length of life. New loans will be purchased or funded as loans already in the portfolio are paid off or new equity comes into the Fund. To be considered for the Fund a loan has to be less than 50% LTV at the time of loan purchase or funding. This limits Preferred Members exposure to 40%.

Northwest Arkansas Build to Rent Duplexes: Our recently completed duplex project in Northwest Arkansas has gone so well that we that have been searching for additional opportunity, finding land to purchase that allows for up to 280 units (140 duplexes). We already have a great contractor/builder relationship in the region from our two existing projects.

  • Scheduled Closing: End of Summer 2021. It is expected that we will have project and civil engineering approval in place prior to the purchase of the land. This will allow us to immediately start working on the site infrastructure.
  • Structure: The structure has not been completely defined, but will likely include both a syndication among our existing investor database and a much larger institutional investor. All investment dollars will be treated equally with a 6 – 8% preferred return and then profit splits thereafter in favor of the investors but reducing as increasingly aggressive benchmark returns are reached. Our investor group’s investment will likely be required prior to closing to help with the preconstruction costs (engineering and architecture) for which the investors will get a bonus on their investment returns.
  • Why we like it: Northwest Arkansas is a region we have loved for many years, but despite our efforts we had not been able to find opportunities at prices we were willing to pay. That changed with the two off market purchases we were able to make over the past months. Once we have a presence in a market, it is always easier to find new opportunities due to the relationships that are built during a purchase and/or construction process. Our existing two projects have performed really, really well to date. Additionally, the land ownership being 140 individual lots versus single multifamily zoned lots provides incredible flexibility. We can build it out and run it as a single multifamily project, we can sell off the duplexes individually, or we can do a combo of the two if we want to lower our cost basis. Altus LOVES opportunities with multiple exit strategies. One of Altus’s core philosophies is to avoid development unless the expected returns far outweigh the risk associated in obtaining the entitlements. And as a key definition, Altus defines development as obtaining entitlements. This is one of the few ground-up projects requiring entitlements that we have undertaken in the last 12 years but we consciously chose to move forward due to the entitlement process in the area being only a couple months in length and rarely not going according to plan. To limit investment exposure, we will have discretionary entitlements in place prior to us completing the purchase of the property.
  • Project Strategy: As part of the purchase agreement the seller is finalizing the zoning change to allow for the duplex build out. We have identified a local engineering company to design the project and their efforts are underway. Our internal requirement is that we have discretionary entitlements in place prior to completing the purchase on the land, though we expect a more aggressive outcome of also having the engineering site work also approved at purchase so we can immediately start working on the improvements.

Dripping Springs Industrial (Austin MSA): A local developer is close to completing the construction on a multi-building office warehouse (light industrial) park. He is doing a decent job of construction, but is having difficulty trying to lease the space on his own without a leasing broker involved. Approximately half of the space is leased which provides debt service cash flow from the time of purchase. In a market with such a shortage of available space and ever-increasing demand, we are confident that appropriate leasing efforts will result in filling up the rest of the space.

  • Scheduled Closing: Ninety days from contract signing. Contract is out for seller’s signature now.
  • Structure: There is an existing owners association overlay on the park. This allows us to use a combination of 1031 exchanges and fresh investor equity in such a way each investment source can own their own portion of the park.
  • Why we like it: It is no secret that we love industrial. And that we love the Austin MSA. This project additionally provides opportunity for upside through completing the lease up and then either selling to capture the gains or refinancing to long term debt to benefit from consistent cash flow from newer construction.
  • Project Strategy: Buy, lease up, and either sell or refinance to long term fixed rate debt. Each option may also be done in part due to the individual buildings having individual legal descriptions.

Charleston Industrial: Ground up construction and lease up of 1.3 Million square feet of industrial in the Charleston South Carolina metro. We have long loved the metro (and the Carolina’s more broadly) and of course, love industrial. The opportunity came to us through a channel partner who negotiated the land purchase (fully entitled) through a government agency.

  • Scheduled Closing: Fall 2021
  • Structure: We will be raising initial funds for the preconstruction costs with those funds being allocated a worthy/generous preferred return through property purchase. Additional equity funds will be raised to purchase the land and provide required capital for the build out and lease up. These additional funds will almost certainly be institutional equity. The initial equity will roll forward into the construction phase of the project at the stepped-up basis (including the preferred return earned) and be pari passu with the institutional investor. We are likely to raise the preconstruction investment in conjunction with the preconstruction equity needed for the KC multifamily (see info below) to spread the investment risk by including multiple geographies and product types.
  • Why we like it: We love industrial. We love Charleston as a market. We have a really strong and experienced team on board that has specific knowledge of the area. Unlike many of our projects, we are taking on more leasing risks that we prefer, but assuming a successful project, the anticipated profits provide a healthy risk adjusted return.
  • Project Strategy: Build, lease, and likely sell. The investors will call the shots on when the property is sold. We love to be long term owners so we will try to include a buy/sell clause in the investment documents allowing us to buy out the investor instead of it being a third party sale, if we are able to do so.

Kansas City Multifamily: Another market that we have long liked and a product type we are comfortable building and owning. This project is 398 units of new construction multifamily in a part of the KC metro that has a severe shortage of Class A multifamily. Similar to the Skyline Apartments we recently completed in Northern California (Chico), we are being brought in to assist a local expert with a project they wouldn’t otherwise be able to complete.

  • Scheduled Closing: January 2022
  • Structure: The investment structure will be very similar to the Charleston industrial project mentioned above. In fact, as outlined above, we plan to raise the preconstruction money for both projects as part of the same investment structure.
  • Why we like it: The project and product type are in our investment wheelhouse. The metro is a strong multifamily market and the particular submarket where the property is located has a severe multifamily shortage. Like the Charleston industrial project, the risk adjusted returns are strong.
  • Project Strategy: Build, lease, and then either sell or refinance to permanent debt. We are optimistic we have identified the larger investment partner for this project. They also have an affinity towards long term ownership, so assuming we are able to work with them on this project, a long-term hold for cash flow and appreciation is likely.

There are several additional projects circling the top of the funnel. We are in the highly fortunate position of having internal conversations not about whether they are good projects or not, but rather if we have the capacity to add more work to our plates. It really is one of the best problems someone in our industry can have.

As an aside, earlier in the month I virtually attended the Strategic Investment Conference arranged and hosted by Mauldin Economics. This is the fifth or sixth year in a row I have attended, and after this second year of it being held remotely via zoom, I look forward to being there in person again next year. This year’s speaker line up did not disappoint, including notables such as Oak Tree Capital’s Howard Marks, Catherine Woods of Ark Investment, ex Federal Board of Governor Richard Fisher among many others. If you are interested in seeing my notes from the conference, drop me an email and I can send those to you.

Happy Investing!

Forrest Jinks

Altus Equity Group Inc.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.

Please NoteThis newsletter is for informational purposes only and is meant only to provide general background information on various opportunities and about Altus Equity Group Inc., a Delaware corporation (“Altus”).  Information contained in this newsletter is believed to reliable but is not guaranteed.  Nothing contained in this newsletter is or shall be construed as an offer or solicitation for the purchase or sale of any security. Any such offer to purchase securities will be made only through a private placement memorandum, investment description, any operating or partnership agreement, and/or subscription agreement (“Offering Documents”) pertaining to any of these opportunities. Any investment information contained in this newsletter is superseded in its entirety by the information contained in the Offering Documents. Only by reading and evaluating the Offering Documents carefully can one determine whether any Altus-sponsored investment’s risk and conflicts of interest are acceptable to you.