Paladin Realty Partners has made a name for itself as a prominent developer and owner of workforce housing in Latin America, and it remains committed to the region as it gears up to launch its fourth Latin America-focused fund. However, the Los Angeles-based private real estate investment firm also has been investing steadily in the US multifamily market for more than a decade and is now looking to make a more aggressive push in 2012. Frederick Gortner, managing director, reveals the firm’s plans in an interview with PERE.
PERE: What opportunities are you seeing right now in the US housing market?
Frederick Gortner: We’ve been a niche player in the housing investment business in the US for the last 16 years. We’ve focused on what I would call workforce housing – renters by need, not by choice. What we do is we buy, renovate and reposition Class B and C apartment buildings across the US. We’ve done it in major markets, but we are finding pretty compelling opportunities right now in secondary and tertiary markets. They tend to be less competitive and the pricing tends to be more attractive by a variety of metrics than those in the gateway cities, where a lot of the institutional capital seems to be focused.
PERE: What is your strategy in investing in multifamily properties?
FG: The fundamentals for rental apartments really have never been more compelling. Every percentage decline in homeownership rates is a wave of new renters. Stabilised apartments in gateway cities are at an all-time high in terms of pricing, with assets having recovered to their pre-financial crisis levels, but we’re not competing with that. We’re an alternative strategy within the apartment space, so it’s a more value-added in focus. Such properties tend to have operational challenges, like deferred maintenance or vacancy issues.
PERE: How do you put your investment dollars to work?
FG: We bring in a fresh dose of equity to recapitalise or refinance a property to get it to a more manageable debt load. We also provide capital to address all the different maintenance issues. We spend about 12 to 18 months improving the operations at the property so, by the time we’re done, we’re generating pretty attractive returns, often times north of 10 percent on our invested equity. We’re able to do this because we focus on the value-added plays in the Class B and C space in secondary and tertiary cities, where it’s less competitive. We’re able to get in and get out before we hit replacement costs, so we’re not facing the kind of supply-side risk that you’re already seeing in the gateway cities.
PERE: In terms of your overall investments, how much does US opportunistic housing account for?
FG: It’s a growing part. For our Latin America business, which is what Paladin is mainly known for in the institutional world, we’ve done about $5 billion of real estate in Brazil and throughout Latin America, and we closed our last Latin America fund at $554 million. However, we’ve done the apartment business non-stop since 1995, primarily with high-net-worth capital, although we’ve had some institutional capital as well. We’ve invested about $1 billion in apartments in that timeframe, which is about 100 assets and roughly 20,000 units.
PERE: What kind of growth are you anticipating in your US multifamily investments?
FG: We’re looking at putting out anywhere from $50 million to $100 million in equity per year in this space. We were net sellers in this space from 2005 to early 2008, but we’ve become net buyers again and we’re ramping up our acquisitions.
PERE: What’s your exit strategy?
FG: Once you’ve corrected some of the operational deficiencies and it’s 95 percent leased, there’s a deep, deep universe of buyers, whether it’s institutions or local syndicates.
PERE: What’s your outlook for the US opportunistic housing market?
FG: We’re not smart enough to know when the world is going to finally work through all of the challenges and uncertainties that face us, or when meaningful job growth and recovery of the housing sector is going to happen. So the investments that we’re making in this space have to make sense under today’s market conditions, as well as a continuation of those conditions. So we’re underwriting on rents that exist today, demand drivers that exist today and exit pricing that is more conservative than what exists today.