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The term ‘multifamily’ is one that may be unfamiliar to many Australian investors, quite simply because it is an asset class that does not yet exist in Australia. Multifamily describes an apartment complex or community, where all of the occupants are tenants, i.e. there are no owner-occupiers. The property is owned in whole by a single owner, often an institutional investor or family office. These can be large assets, providing between 300 and over 1,200 rental units in a single property. They can either be ‘downtown’ high-rise, or suburban low-rise, gated, ‘garden-style’ communities. Larger assets employ on-site property and leasing managers with 24/7 on-site security. Leases are for 12 months, although many tenants stay for much longer periods – from years to decades. Investors like the shorter term leases in multifamily, as it allows quicker access to market increases than other property types.
Approximately 35% of US households are ‘renters’ and over the past 30-years, the multifamily market has grown to the point where it is the dominant provider of residential rental accommodation in the US. New household formation, immigration, a transient US workforce, and – increasingly – downsizing seniors, are all important demand drivers.
Multifamily has also grown to become the second largest commercial property asset class in the US, second only behind the commercial office market. The US multifamily market has deep liquidity, with over US$170 billion in assets traded during 2018. This liquidity is supported by many different lenders, from national and regional banks, to the largest lender in the sector – Freddie Mac – which underwrote and securitised US$78 billion of multifamily loans during 2018.
Passive, yield-focused investors in multifamily are attracted by the low volatile nature of the income streams that stabilised (i.e fully leased at market rates), well managed multifamily apartment communities generate. A multifamily community with 1,000 tenants provides much less vacancy risk and rental volatility than a commercial office or industrial property of the same leasable area, which may only have a handful of tenants. As such, multifamily has been called the ‘gold standard’ for institutional property investors since the GFC.
This low-risk profile of multifamily is particularly the case with Class-B multifamily properties, as evidenced by the Fund’s US Investment Manager, Bridge Investment Group’s experience with its portfolio of circa 9,000 Class-B units during the Global Financial Crisis. Their experience was an initial GFC induced fall in Net Operating Income (NOI) of 3%, but recovery into positive territory within 12-months as housing affordability became paramount. Over the past decade, national multifamily vacancy rates have fallen to below 5%, and rents for ‘Class-B’ assets – where the fund will focus – and have been increasing between 4% and 5% per annum. In addition, most new supply has been in ‘Class-A’ product, which needs to achieve much higher rents (often 3 to 4 times higher), than Class-B, due to their higher land and construction costs. There is negligible new supply of Class-B product. Also, value-add Class-B multifamily assets, can be acquired at significant discounts to replacement cost, sometimes in the order of 50%. This provides substantial pricing power relative to Class-A and caters to a much broader target market. These are the reasons that Class-B remains the ‘smart’ choice in US multifamily investing.
Spire USA Multifamily Fund IV (AUD) (‘the Fund’) acts as a wholesale Australian feeder fund into the strategy and assets of Bridge Multifamily Fund IV LP (“BMF IV”); a Private Equity Real Estate fund. BMF IV is targeting US$750 million in equity via its capital raise. A Hard Cap of US$1 billion is likely to be determined.
The Investment Manager for the underlying fund is Bridge Investment Group LLC. Bridge is a specialist US real estate funds manager with over US$15 billion in assets under management. Bridge is headquartered in Salt Lake City, Utah, with offices in New York, San Francisco and Orlando. Over the last 24 years Bridge has invested, managed and sold several billion dollars of property assets across all segments of the market. Bridge has a strong operating and property management platform, comprising over 1,000 management, leasing and facilities employees across the 30 states in which assets are owned.
BMF IV will essentially create stabilised multifamily investments for passive, ‘buy & hold’, often institutional, investors to acquire via a competitive process, either individually or as part of a portfolio. BMF IV will be a ‘manufacturer’ of institutional grade assets, on a ‘buy, fix & sell’ basis in order to identify, unlock and return added value to investors. Typically (as the following case Study shows) the strategy will be executed by acquiring a 1980s or 1990s vintage B-grade, suburban garden style asset, which is tired and under ammenitised, and is therefore leased at rentals below the current market for fresher product with better ammenities.
Bridge will implement a business plan which will involve a capital expenditure program to refresh and ammenitise the asset, and then drive a new leasing and renewal strategy at the higher market rents now unlocked as a result of the repositioning of the asset within its market. When it has stabilised the asset (typically 93%+ occupancy at market) and added full value, Bridge will then seek to sell the asset via a competitive process
BMF IV may also develop new assets (5-10% of the portfolio).
The targeted IRR on invested capital for BMF IV is 12-14% net (USD denominated).
HOW THE FUND INVESTS
The Fund will commit, as a single Limited Partner, capital into the underlying fund progressively during the capital raising period, which is expected to run through until the end of Q3 2019. By doing so, the Fund will acquire a proportionate interest in the underlying funds’ assets, at the original cost of those investments. The Fund will also pay an equalisation premium (estimated at between 2-4%), which is paid to earlier Limited Partners to compensate them for their dilution in the current portfolio.
The underlying fund, BMF IV, will continue to raise committed capital during its capital raising period, which will run between 12 and 18 months from its first close, depending upon if and when BMF IV reaches its target or hard cap. The underlying fund will also continue to invest committed equity during its 3 year (from first close) Investment Period. Following the Investment Period, the underlying fund will have a Harvest Period of up to 5 years*, during which time it will sell assets which have completed their value-add plan, and are thus considered stabilised. During the Investment Period rental income will be distributed to investors on a six-monthly basis as at 30 June and 31 December. During the Harvest Period, income from rentals and profits from sale, together with original capital, will be distributed to investors on the same six-monthly basis.
* The Harvest Period contains a 1+1 year extension provision which may be exercised at the discretion of the Investment Manager.
THE INITIAL PORTFOLIO (AS AT DECEMBER 2018)
BMF IV currently has 16 value-add multifamily assets already acquired or under contract at a total purchase price of approximately US$916 million. These are summarised below. If the targeted equity raise of US$750 – $1,0000 million is achieved, then Spire would expect a total portfolio size of 50 – 60 assets with a total purchase price of circa US$2.5 billion.
|Performance as at 30 June 2019||Net Returns|
|Since inception p.a.||N/A|
|Date||Unit Price||Net Monthly Return|
|30 June 2019||N/A||N/A|
|Period||Distribution Amount (cents per unit)||EX price|