Bell Partners fully exits Fund IV with 17% net IRR

The North Carolina manager’s first institutional fund beat its targets, but its latest vehicles may not fare as well.

Bell Partners recently sold the final asset from its first institutionally-backed multifamily fund, a 344-unit complex in Austin, Texas, solidifying investor returns that outpaced expectations.

Bell Apartment Fund IV, which closed on a total of $200 million in April 2013, delivered a 17 percent net internal rate of return and an equity multiple of 1.9x. It had targeted an IRR of 11 to 13 percent and a multiple of 1.6x to 1.7x.

The North Carolina-based firm has parlayed the success of Fund IV into two subsequent fundraises for the series. Fund V captured $425 million in 2015 and Fund VI, which is deploying the last of its $600 million, hit its hard-cap in 2017.

“We’ve had thoughtful, careful, deliberate expansion of our investment vehicles, just as, over the decades, we’ve had thoughtful, strategic geographic expansion as a company,” chief executive Jon Bell told PERE. “That is a testament to our team and the fact that we’ve delivered great results over the past 40 years.”

Fund IV’s returns put it among the higher-performing funds from 2011-12. The top quartile of vehicles from that vintage delivered net IRRs upwards of 17.7 percent and investment multiples of 1.8x, according to the National Council of Real Estate Investment Fiduciaries. Median returns from that time period were 15.5 percent IRR and a 1.6x multiple.

Both Fund V and VI have performance targets similar to those of Fund IV, Bell said. But with investment periods later in the real estate cycle, the firm’s latest vehicles may not fare as well as their predecessor, based on performance data for their vintage years. The median net IRRs for 2013-vintage and 2016-17 vintage funds are 13.8 percent and 8.1 percent, respectively, according to NCREIF.

As of March 31, 2018, Fund V was generating a net IRR of 12.83 percent and a multiple of 1.34x, according to data from the Pennsylvania Public School Employees’ Retirement System, which committed $75 million to each of Bell’s last three funds. PSERS reported a net IRR of -5.84 percent for Fund VI and a multiple of 0.97, though it is common for funds to deliver negative returns in their early years.

Jon Bell told PERE he remains confident in his firm’s long-standing value-add strategy, which focuses on underperforming apartment properties in 14 prime US markets – most of which are in the Southeast, the West Coast and Texas. It typically adds value through renovations, management repositioning, investing in transitioning locations and pricing dislocations.

The US multifamily market has become increasingly popular for value-add investors in recent years. When Bell Partners closed its fourth fund in 2013, there was $2.94 billion of fundraising volume involving value-add funds, according to PERE data. Value-add fundraising volumes then fluctuated but have climbed steadily over the last few years, from $2.88 billion in 2016 to $4.44 billion in 2017 and $5.57 billion in 2018.

Property values have also risen considerably since Fund IV launched in the wake of the global financial crisis, so the days of 5 to 7 percent annual rent increases are in the past, Bell said. However, he expects steady rent growth of 3 percent in the coming years.

“There’s still a lot of positive fundamentals in the apartment sector, a lot of positive demand trends, so we feel good about delivering returns for our fund expectations with Funds V and VI, but the pace of growth has been slowing,” he said. “It’s still growth, it’s just a decelerating pace of growth.”