Interstate Equities Corporation (IEC), a Los Altos, California-based multifamily investor, has closed its first commingled fund, PERE has learned.
The firm founded in 1981 and now run by the second generation of the Boyd family, closed IEC Institutional Fund III last week at $200 million, the vehicle’s target and hard cap. The firm launched the value-added fund in the first quarter of 2015 after raising capital for previous investments through separate accounts and joint ventures. IEC held a first close for the vehicle in the fourth quarter of 2015 on $120 million. The firm is targeting a net internal rate of return in the mid-teens and a 1.5 to 1.7x multiple on its investment.
“Coming into 2015, we thought long and hard about what we wanted to do from a fundraising perspective,” Peter Casey, the firm’s director of equity formation, told PERE. “We’re trying to replicate doing good deals in a more efficient capital structure.”
As the US nears what many investors predict will be an economic downturn, a commingled fund suited the firm better than investing through separate accounts, Casey said. IEC did not use a placement agent for the vehicle.
“Frankly when we look into the market, we see the commingled fund structure offers the most durability,” he said. “It’s most efficient in times like this when we’re sharpshooting and in times of dislocation when equity tends to seize up in separate account and joint venture accounts. This fund structure gives us the ability to do what we do best.”
Marshall Boyd, the firm’s co-president, said the firm’s investor base comprises endowments, foundations, family offices and a corporate pension plan, along with a significant co-investment from the firm’s executives. He declined to name any specific investors. Boyd said IEC approached public pension plans, but found most were looking to make larger fund investments.
Boyd and his sister took over the family firm from their parents about a decade ago. Despite a change in generational ownership, he said the firm’s investment thesis remains the same. IEC looks for “unloved buildings in the best parts of California,” he said, in infill markets where small, family-owned firms control the majority of the housing stock, such as Santa Barbara and Hollywood. IEC has grown from a mom-and-pop shop into a vertically-integrated firm that manages about $300 million in assets, Boyd said. That institutional feel allows IEC to upgrade both the physical elements of an apartment building and its infrastructure, adding technology that smaller landlords cannot offer.
Boyd said the biggest structural difference between the first and second generation’s ownership is the use of leverage. The firm’s average loan duration increased from about four years in 2007 to 15 years today, and leverage levels are down to the low 60s compared with the mid-70s previously. He said such cautious investment strategies are meant to hedge against losses from any future downturn.
Boyd’s sister and co-president Julia Boyd Corso said the firm acquired Marin Gardens, a 46-unit apartment building at 124 Merrydale Road in San Rafael, California, for an undisclosed price last July. The firm is currently renovating the apartment units and it has also upgraded the property’s backend, offering online services so residents can pay rent virtually, among other features.
The firm has not yet deployed capital from the commingled fund, but said it has a strong pipeline of assets.