Core creation

For Paul Dougherty the hype surrounding private equity real estate debt vehicles has proved to be too much. Instead, the president of Perseus Realty Partners argues investors should concentrate on the real opportunities at hand: manufacturing core assets. By Zoe Hughes

Perseus Realty Partners

Founded 2005
Headquarters Washington DC
Real estate funds Perseus Capital City Fund, closed on $150 million of commitments
in 2006.
Perseus Realty Partners II, which held a frst close in April 2008,
targeting $200 million.
Latest deals The Grand Parkway; a 250-unit age-restricted apartment community in
Houston, Texas, in a joint venture with developers Blazer Building.
$4.5 million equity investment, total capitalization of $21.8 million.
September, 2008.
Interstate Center II; a 604,000-square-foot distribution center in Savannah,
Georgia, in a JV with TPA Realty Services and Resource Real Estate
Partners. Total capitalization of $23.2 million. August, 2008.
Ansley at Princeton Lakes, a 305-unit multifamily community in Atlanta,
Georgia, in a JV with Hathaway Properties. Total capitalization of
approximately $30 million. June, 2008.

Size matters
Operating along the East and West coasts of the US, Texas and Chicago, Perseus Realty is flexible over which real estate sector it invests in, excluding only hospitality and for-sale housing. The firm is currently investing in the senior housing, multifamily and industrial sectors. Eight months of continued job losses have left Dougherty cautious about office properties generally, while retail, he says, is getting “crushed through a myriad of forces. It doesn't mean we won't look at retail, but just not at the moment.”

Investing through its second fund, Perseus Realty Partners II, the firm has closed three deals to date including a market-rate housing development in Atlanta, Georgia; the construction of a 600,000-square-foot distribution center next to the Port of Savannah in Georgia and the development of a 250-unit agerestricted apartment community in Houston, Texas. The last transaction, which closed last month, is a joint venture with local developer Blazer Building, in which Perseus is investing $4.5 million of equity. Taken together, the total capitalization for all three deals comes to roughly $75 million.

“Our primary advantage is the size of the investment we make,” Dougherty says. Funds that would typically invest upwards of $100 million per deal are now being forced to reduce their investment size just to get their money out, he continues. “It's going to be very hard for them to do that given the size of their fund, let alone the intensive nature of asset management required to monitor the number of investments they will have to do to fully deploy their capital.”

“Diversification is the best approach, especially in this climate,” Dougherty adds. “We think it's better to make a larger number of smaller investments. Perseus Realty will always be in this space because this is where we see the greatest opportunity throughout all phases of the real estate cycle.”

Core exit
Two strategies that Perseus is actively pursuing are those of medical office/research and development and GSA (US General Services Administration or government) buildings. Following a successful medical office development in the firm's first fund, Perseus Capital City Fund, Dougherty says Perseus Realty is keen to acquire and reposition small- to mid-sized laboratory space of between 25,000 and 100,000 square feet which can “incubate” emerging bio-pharmaceutical companies. Boston's Route 128 corridor is one area where the strategy could be extremely effective, Dougherty adds. “We are entering into a programmatic deal where we will acquire and reposition a handful of these facilities, create a portfolio, and dispose of the assets to an institutional investor.” Perseus Realty's previous investments in medical office generated a 2x multiple and returns north of 270 percent.

Another growing area is that of GSA buildings or properties used and leased by US government agencies. As the feature on Washington DC on p.44 demonstrates, the US federal government is one customer that rarely cuts back on its demand for real estate. Dougherty says the credit dislocation is making the sector look even more attractive. “It's a very interesting time for these properties and their owners because the illiquidity that currently exists is inconsistent with the strong fundamentals and credit-worthiness of these properties.” With a lease renewal rate of around 94 percent, compared to roughly 65 percent for general commercial real estate lease renewals, Dougherty argues there is a big opportunity to be had.

Many lenders, he explains, find GSA properties too “binary,” that is you either have a large-scale tenant or you don't. In turn, the illiquid debt markets are also heavily penalizing such properties. “At the end of 2007, the risk-based premium of core office was 50 to 75 basis points over the 10 year Treasury. With a GSA building, you can achieve cap rates in the 7.5 percent to eight percent range, that's a risk-based premium of 400 basis points over the 10 year Treasury,” he explains. “That's the sort of penalty and the mispricing of risk that the market is putting on this type of asset class. That is unheard of, not warranted and presents a very exciting opportunity to pick up GSA assets.”

Paul Dougherty

Career 2005: Perseus Realty Partners and Perseus Realty Capital, President and Founder.
2002: CBRE acquires Insignia/ESG. Dougherty appointed managing director in charge of the
Eastern region, US, for CBRE's investment banking division, LJ Melody.
1996: Insignia/ESG acquires Washington DC-based commercial real estate services company
Barnes, Morris, Pardoe and Foster. Dougherty holds a variety of positions including National
Director of Finance and Capital Markets group.
1987: Joins commercial services company Barnes, Morris, Pardoe and Foster. In 1994,
Dougherty is Vice President.
Education BS in Business Administration, Real Estate Finance and Urban Development from
American University.