In his office in downtown Washington, DC, Paul Dougherty has a wall-sized aerial photo of the District, detailed enough to pick out individual buildings all over town, from Foggy Bottom to Anacostia.
It's appropriate for Dougherty, who grew up in Washington, DC, and attended school in the city as well, at American University. Since coming to Perseus in 2005 to launch two property platforms, the real estate firm has invested in a few office and residential projects in the hot DC market.
“When I got into real estate in DC, it was sort of the other economy in Washington,” Dougherty says. “It was a chance to do something different.”
Working with parent company Perseus Capital Partners, the private equity shop founded by Frank Pearl, Dougherty launched investment management firm Perseus Realty Partners and investment bank Perseus Realty Capital two years ago.
The investment banking arm of Perseus is focused on real estate finance and advisory work, while Perseus Realty Partners has raised its initial $50 million private equity real estate fund, focusing on value-add strategies in the US middle market. The firm is close to raising its second fund, which has a target of $200 million and plans to continue the strategies established with the first fund.
“We are a fundamental, value-oriented, opportunistic investor,” he says. “When we make investments, we're looking for assets with some level of cash flow, but we're investing in assets in transition— that have intrinsic value and an infill location—and that can be repositioned back to core properties.”
There are some obvious benefits to having a real estate investment bank sitting next to a private equity real estate firm. In fact, Dougherty says, the possibility of synergies between the investment bank and the investment management company were a motivating factor when he set out to establish the platforms.
“Having a real estate investment bank platform that is permanently in the capital markets provides us with deal flow,” he says. “It provides us with intelligence on value, on spread, on where the debt markets are, day in and day out. And it really helps us identify trends in the marketplace.”
So far, the firms have worked hand-in-hand on projects like the $37 million development of 1200 Blair Mill Road, a 96-unit condominium program in suburban Silver Spring, Maryland.
But while there are some obvious synergies among the realty companies at Perseus, the property investment group has also identified ways to capitalize on its relationship with parent firm Perseus Capital Partners. For instance, Dougherty says the fund has looked closely at opportunities in repositioning surplus corporate property—like the extra office, warehouse or manufacturing space oftentimes acquired alongside a private equity investment.
“Naturally, when a firm like Perseus buys a company like Hagar slacks or Converse shoes, they have excess real estate that comes into play as a result of taking a manufacturer and moving it offshore,” he says. “Although to date we have not invested in any of these assets, we have consulted with them and offered them counsel on how to best dispose or create value with that product.”
And it's a strategy that Perseus Realty will be looking at going forward. “We're hoping as time goes on, as there is more capital and as we expand our footprint, we will be more active and working more closely with them,” he says.
“we are a fundamental, value-oriented, opportunistic investor. when we make investments, we're looking for assets with some level of cash flow, but we're investing in assets in transition—that have intrinsic value and an infill location—and that can be repositioned back to core properties.”
But the Perseus umbrella offers the realty upstart more than just the opportunity to invest in real estate cast-off from a buyout investment. Dougherty points out the high-profile executives at the firm that can provide all manner of advice, counsel and contacts. These include Washington stalwarts like former Clinton Administration diplomat Richard Holbrooke, former Fannie Mae head James Johnson and prominent DC accountant John Schwieters.
“Those are people we can turn to,” Dougherty says. “We didn't start this as a de novo operation with no other company behind us. The fact is that we have Perseus and we can turn to them: The advice and counsel we can get from walking down the hall is invaluable.”
Dougherty says the fact that the firm is relatively young is important to its overall culture. “We have not been around for thirty years, where you tend to fall into a culture and that culture overrides the individuals,” he says of the team at Perseus. “I think at our company the individuals override the culture and really establish that culture.”
At the same time, managing director John Jarrett, who joined the firm earlier this year to spearhead fundraising and investor relations activities, sees this as informing Perseus' investment style. “We've built an enterprise to be responsive, quick and nimble within any given economic or market cycle, not only as a business, but in the execution of our strategy,” he says.
Perseus Capital City Fund I closed on $50 million in March of this year. The fund, which is more than 80 percent invested in seven properties, raised money from a diverse group of LPs including life insurance companies, corporate pensions, family offices and high net worth investors.
The fund is looking at in-fill investments nationally, but has so far focused on projects on the East Coast between Boston and Miami—including a number of projects in the Washington area. “That is basically a result of the fact that we were here seeing deal flow before we had our first closing on our fund,” Dougherty says.
In addition to a broad geographic footprint, the firm takes a diverse approach to property-type. The fund's portfolio includes a medical office building, a retail property, three multifamily assets and two adaptive reuse projects in the industrial and office sectors.
“At the end of the day what we're creating is a portfolio that is diverse by geography, by property type, by operating partner, by investment theme and by number of investments in the fund,” Dougherty says. “Those collectively are a risk-mitigating tool.”
In addition to its diverse geographic and sector mandates, the firm is committed to its focus on the middle market.
“The strategy is to take advantage of what we see as an increasing lack of capital in this middle market space,” Dougherty says. “What you've seen in the past is, as other funds have gotten bigger and bigger, they created more of a void in this middle market space, which we've defined at $5 million to $15 million of equity or $20 million to $75 million capitalization.”
Not as sexy?
With the closing of its first fund, Perseus has identified a number of strategies that it is actively pursuing—and plans to continue pursuing with its next vehicle.
These include leasing management plays, where the firm will finds poorly management assets, re-brands and re-leases them and hopefully brings new life to the property. The firm also looks at renovation strategies, which can also include a re-leasing component. Perseus pursues adaptive reuse plays, where it aggressively repositions an asset from, for example, a single-tenant logistics space to a multi-tenant one or an obsolete downtown office building to a boutique hotel. The firm also looks for distressed properties and development opportunities.
The firm has less of an allocation to ground-up development projects than the other strategies, something Dougherty chalks up to increasing construction costs and the time needed to acquire and develop a project from start to finish. “A lot can happen in four to five years, during that process,” he says.
Still, the firm maintains that its strategies will be profitable throughout economic and property cycles. “We are a fundamental, value-oriented opportunistic real estate investor,” he says. “It may not be as sexy as buying and flipping, but we feel this strategy is appropriately in all stages of the real estate cycle and the US economy.”
“That's where we see a lot of people in the market, having to basically feed the machine. we would rather, from an investor perspective, go out and raise smaller funds but essentially cut our investment time so that we are quicker to market and offer fund after fund to the investor with the same strategy.”
Perseus has put its strategy into action in a number of assets. Close to its Foggy Bottom offices, the firm has invested in a medical office building on M Street that, when acquired along Perseus Realty Capital for $33 million, was 82 percent leased. The M Street property was a lease-up and renovation play: The firm renovated the building systems, adding an onsite parking component and leased up the building by attracting new tenants and having some tenants expand their space.
“This was not a market-timing play,” he says. “It was not a cap rate compression play. It was real estate investing 101.”
Further North along the Eastern seaboard, Perseus found an opportunity in the New Jersey suburbs of Philadelphia in the form of a 384-room apartment complex called Parkcrest Village. Owned by four families in New York, the multi-family property suffered from poor management.
“When we performed due diligence, we determined the rents were 20 percent to 25 percent below market,” Dougherty says. “The property was aesthetically in decent shape, but was grossly mismanaged and poorly leased. Our goal with this asset is to perform a moderate renovation, completing a renovation program that was put in place by previous owners.”
The firm plans to increase the rents and put institutional management in place in an effort to stabilize the property before selling it in three to four years. It's the sort of play Perseus would like to pursue with its next vehicle, though Jarrett says similar opportunities require a fair amount of digging.
“There are opportunities in the B- to B+ play, but those are getting fewer and farther between,” Jarrett says. “They're in the market. You just have to look for them.”
Not feeding the machine
Moving forward, Perseus expects to finishing investing its inaugural vehicle—and head out on the fundraising trail— sometime in the fourth quarter of this year. The new fund will look to raise $200 million to continue Perseus' strategy and will target a 20 percent IRR for investors and a 2x equity multiple. Ultimately, the next fund will seek to make 20 property investments.
The strategies will remain, though their target allocations will shift somewhat in the new fund. Leasing plays, adaptive reuse and renovation strategies will each command a 20 percent allocation in the new fund; the most surprising jump will come in distressed deals, which only had a 5 percent target in the first fund. The second vehicle is targeting 20 percent for distressed deals.
Dougherty says the firm is eyeing distressed properties because of the overbuilding of condos and offices in some markets, as well as financial distressed caused by trouble in the commercial mortgage-backed securities market.
But Jarrett says the firm isn't going out in the market to raise larger and larger funds and get forced into investing in larger and larger deals.
“That's where we see a lot of people in the market, having to basically feed the machine,” Jarrett says. “We would rather, from an investor perspective, go out and raise smaller funds but essentially cut our investment time so that we are quicker to market and offer fund after fund to the investor with the same strategy.”
As the firm looks to talk to LPs about its next vehicle, Dougherty reflects on how to make Perseus' property investment strategy work in the competitive US real estate market.
“It comes down to three basic elements,” Dougherty says. “It comes down to your ability to be creative, to be able to access deal flow differently than your competitor, and to aggressively manage the value creation process—to provide a higher risk-adjusted rate of return to the investor.”