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Oak Street scores top PERE 100 debut spot

Consistency in strategy and performance has led to strong investor support for the Chicago-based manager born after the global financial crisis.

Chicago-headquartered Oak Street Real Estate Capital is the only newcomer to land in the PERE 100’s top 20. Its placing comes after raising a total of $6.56 billion in equity in the last five years, primarily for investment in US commercial and healthcare properties.

The capital includes $2.5 billion for its Oak Street Real Estate Capital Fund V, which was launched in 2019 with a target of $2 billion, making it the largest single vehicle raised by the manager. Investors included US public pension funds such as Teachers’ Retirement System of the State of Illinois and Texas County and District Retirement System, which each contributed $150 million.

“The vast majority of the capital that we have raised is allocated to our net lease strategy,” Marc Zahr, founder and CEO of Oak Street, tells PERE. “This strategy targets single tenant, investment grade-backed properties with long-term, triple net leases of 15 years.”
Of the 16 funds it raised, five have been for net lease strategies. Each has a target return of net 12-14 percent and has been invested in US single-tenant office, industrial and retail properties.

While 53 percent of Fund IV was allocated to industrial properties, including manufacturing, Fund V is expected to be over-allocated to single tenant, net-lease investment grade industrial properties as well, but also to essential retailers – health facilities, groceries, and pharmacies – according to Zahr. “We’re not shying away from those essential retailers – we still believe in them and think they will continue to perform.”“We’ve been extremely consistent and disciplined: our strategy from our first through to our fifth fund has been identical,” Zahr adds. “Another reason for our [fundraising] success is that we’ve exceeded our target net returns in our first three funds and, as a result, we’ve been rewarded by our investors and partners.”

Zahr adds that Oak Street is also “extremely selective” in office acquisitions, only buying single tenant, “mission-critical” office buildings instead of multi-tenanted properties. “We would have to truly believe the company needs to operate and needs to have their people in that building on a fully occupied lease of 15 years in order to move forward with an acquisition,” he says.

Calm in a crisis

Oak Street has managed to achieve 100 percent of its due rent collection from its tenants in April and May, more notable given the covid-19 crisis.

“I always took it for granted that every single tenant, because of their strength and quality, would always pay their rent. Today, every member of the team is on edge and making sure that every penny gets in and is in-line with expectations. We have been able to accomplish that.”

It is this sort of experience that leads Zahr’s firm not to shy away from investing in a crisis. Indeed, he founded the firm in 2009, just as the world was emerging slowly out of the global financial crisis.

He tells PERE: “We wanted to create something that could perform in any economic environment. Even though the tenants are investment grade, our entire thesis was built on developing a strategy that could withstand really bad events.”

Even in today’s uncertain climate, the firm still managed an 8 percent yield distribution for its investors, an obligation it has not missed during its 11-year existence.

Oak Street services a “traditional” institutional investor base, consisting of public and corporate pension funds, endowments, foundations and family offices. It has a couple of overseas investors, but the fact most are US-based meant that the firm did not have to travel abroad to raise capital and hence was able to raise funds more quickly, according to Zahr.

Looking ahead as the market seeks a recovery post-Covid-19, Oak Street is by no means out of the woods yet, just like its peers.

“But the fact we’ve been as resilient as we have and the portfolio has performed as well as it has over the past 60-90 days is a very good sign,” says Zahr. “It’s a case of making sure your house is in order and your existing portfolio is still performing in line with expectations. Next, you move on to finding deals that make sense.”

That will not necessarily be easy, he says. “Finding appropriate financing in this environment for new acquisitions has been a challenge. We’ve been able to do it but it’s definitely slower and harder to come by.”

Meanwhile, the work goes on: “We are actively looking for opportunities, making sure that we will continue to deliver our monthly distributions and collecting all of our rents as we have the past two months and over the past 11 years.”