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Posted Apr 27, 2021

How CRE investors are fundraising in 2021

How CRE Investors Are Fundraising in 2021

Juniper Square customers Natalie Greenberg of MJW Investments and Ernest Johnson of ApexOne recently sat down with Brandon Sedloff to discuss what the past year has been like for their respective businesses and their thoughts on emerging commercial real estate trends and capital raising in 2021.

With an end to the pandemic in sight, both saw positive signs that a commercial real estate recovery is underway — the overall economy is benefitting from vaccine- and stimulus-induced optimism, property distress is easing, CRE sectors that performed well during the COVID-19 crisis continue to flourish, there’s an abundance of capital, and investors are looking to invest. That’s good news for the more than 90% of Sponsors planning to raise capital this year.

The importance of referrals

Ernest Johnson, Executive Managing Director at Texas-based ApexOne, said, “Fundraising during COVID was different — not easy, but easier than we thought it was going to be.” They closed their third fund early in the pandemic. It took them 18 months to raise $108 million. In October 2020, they launched their fourth fund, which will focus on acquiring properties from distressed sellers. They raised $100 million dollars in less than 60 days, and stand at roughly $140 million today. Ernest says, “We weren’t sure what the reaction was going to be so we were happily surprised. Much of the capital came from referrals. More than 90% of our investors have invested with us in all four of our funds, so word of mouth has been important to our success.”

Lessons learned

For Natalie Greenberg, Chief Operating Officer of Santa Monica-based MJW Investments (MJW), proactive communication became more important than ever during the pandemic. She says, “COVID obviously changed a lot of what we did over the past 12 months, but in terms of communicating with our investors, we doubled down on what we do right. Instead of traveling to see our investors, we had Zoom calls. We also had success running webinars featuring our founder, Mark Weinstein, who provided updates on what we were seeing in the markets. In many ways, it was actually easier to interact with investors. Instead of making 50 individual calls, we used the Juniper Square platform to keep our investors informed.”

Ernest echoed this sentiment.

I think what really helped us is the level of communications we had with our investors during the pandemic. Thanks to Juniper Square, it was easy to communicate with them on a regular basis in a secure manner.

"We were able to let them know what was going on at the property level and how we were managing through uncertain times. We also shared this information with potential investors. They saw how we were communicating and what we were achieving with our properties, which really helped spur interest in our fourth fund.”

Increased interest in property-level information

Both agreed that investors are more interested in property-level details.Before, as long as our investors got their monthly distribution, most were indifferent as to where it came from,” Ernest said. “Over the past year, investors have been more interested in the properties. We were able to provide regular updates, and I think providing that level of transparency made a big difference in investor confidence.”

Natalie said their investors grew more interested in how loans were being serviced. Because MJW specializes in multifamily and student housing on the west coast where COVID-related moratoriums are common, their questions soon shifted to what was going on with tenants. With payment plans in effect until June, MJW has kept their investors informed by providing regular updates on what they were doing to collect rent.

Fundraising now

One of the things we learned in our capital-raising survey is that most firms have been focused on raising money from existing investors. But going forward, most survey respondents said they are looking to raise capital from new investors.

That’s true for MJW, who is planning to add new types of investors and new partners in 2021. Natalie says, “I would say the big shift for us this year is that we’re expanding beyond individual high net worth investors to work with more family offices, RIA platforms, and aggregators of equity. We’re also moving from only sourcing deals ourselves to working with best-in-class operators. We’ve identified one in Phoenix and one in Dallas to help feed our pipeline. Equity hasn’t been the issue — and still isn’t the issue — it’s finding the right deals that match up with what the equity needs.”

Ernest concurred, “It’s just a matter of having the right product for the right investor. When we started planning our fourth fund, we thought there would be more distressed properties. But we realized COVID was more of an event recession than a cyclical recession, and we adjusted our expectations. We didn’t foresee massive discounts like we saw in 2008 and 2009 when properties were trading at 35% or more below their previous values. But having been through a number of recessions, we did expect some owners and developers would be caught in the wrong place at the wrong time.” They changed their focus from distressed properties to distressed sellers, and investors responded — and more than 30% of investors are new to ApexOne.

Early in the pandemic, MJW also expected an increase in distressed properties and wanted to have the dry capital. They ‘soft circled’ $100 million, but never saw the distress in multifamily that was happening in hotels and retail. Natalie says, “We re-evaluated and decided not to hold the equity because we didn’t have the right way to deploy it.” Instead, they continued to focus on syndicated deals. Natalie says that one of the things that Juniper Square helped them do was to expand their network and open up these deals to different types of investors. “We have RIAs that invest a million dollars in checks of $50,000 or $100,000.

In the past, it was cumbersome to deal with those smaller checks, but with the Juniper Square platform it’s not. It’s like blasting out communications — you click one button and we can work with everyone.

Cash flow is king

Natalie says most MJW investors are still focused on cash flow. “We have to show IRR to demonstrate we’ve thought through the process of what an exit looks like and where we’re adding value, but what our investors really want to know is ‘When will I get my first distribution?’ and ‘Is it going to be consistent?’ I think RIAs are similar. Institutions don’t care as much about getting a distribution in the first 12 months or even the first three years. They want to know if we are going to hit that IRR when we sell an asset. That’s why we’re staying cautious when working with institutions because we can add more value by buying assets that provide initial cash flow. We can upgrade the units over time and continue to give steady cash flow to our investors.

ApexOne also deals primarily with high net worth investors. Ernest says, “Our investors have a heavy dependence on and expectation of cash flow. We have two open funds that provide good cash flow, including a growth and income fund that is generating about 8% monthly on an annualized basis right now. In our newest fund, however, we’ve told investors they shouldn’t expect the same cash flow because we’re buying distressed situations that we’ve got to correct. We think cash flow will be about 4% to 5% in the first year. Once we get properties stabilized, we’re looking at about a point and a half of cash flow every year. The properties are stabilizing very quickly — one property we bought was 50% occupied, and we have it up to 72% in just a few months.”

Tips to attract new investors

When you don’t have the existing base, Natalie says there are a couple of ways that you can attract new investors. “Offer better splits on your first few deals to make it appealing for someone to take a risk on you — after all, they’re not just taking the risk on the real estate, they’re taking a risk on your execution. If you don’t have a proven track record and a big investor base, you have to cultivate that. Maybe you lower your returns to the GP, and give your investors a sweetheart deal.”

Natalie continued, “Another approach is to work with a broker that will help raise equity for a fee. If you’re just starting, the first few deals you do might not make any money or you might just break even. That’s what you have to do to prove yourself. Once you start proving yourself, you can slowly bring down that preferred return from a 10 to a nine to an eight, until you see what the sweet spot is.”

If you’re looking to expand your base, Ernest says they’ve found success participating on panels. “It’s a good way to get your name out there and talk to people so they can see what you’re doing. It’s really just about marketing your firm and getting exposure.”

Referrals are another option — and a strategy that 80% of respondents to our capital raising survey plan to use in 2021 — although they are harder to scale. Ernest says, “Referrals from your investors are the strongest endorsement possible, but it’s difficult to rely exclusively on them to grow your investor base quickly. It’s taken us 10 years to get to to put a solid referral program in place. You can’t just flick a switch. We’ve found success with RIA networks that screen firms and tell their subscribers which ones check all the boxes and they have good returns.”

Ernest also stressed the importance of audits. “All of our funds are fully audited. Plus we use an independent valuation group. Our larger investors want to see that we are doing everything correctly — and that includes a full audit when you’re running funds and you’re regulated by the SEC — so that’s helped us win investors as well.”

Safeguard investor information

Johnson says that, in working with RIAs and foundations, they’ve found this audience to be very concerned about the security of information and data transfer. ApexOne was recently evaluated by a third party that conducts reviews for firms like Hightower and other big networks. They received the highest rating of ‘Retain.’ Johnson says, “We were the smallest company to ever receive the top rating. One of the things they lauded was our secure transfer of information to investors. Other firms got crushed in the ratings because they’re trying to use servers in their back room.

The reviewer loved the Juniper Square platform. They found it one of the best they’ve seen in terms of giving investors confidence that the transfer of their information is secure.

"If you can’t check that box, most RIAs and some of the more knowledgeable private investors won’t give you their money.”

Technology takes off

It’s telling that 56% of CRE respondents to Deloitte’s 2021 CRE Outlook survey said the pandemic exposed shortcomings in their organizations’ digital capabilities. Only 40% of respondents said their company had a defined digital transformation roadmap. This prompted John D’Angelo, Deloitte Consulting’s U.S. Real Estate Leader, to state that one of the lasting impacts of the COVID-19 crisis on commercial real estate will be an acceleration in the industry’s use of technology.

Since we offer software GPs can use to run their front, middle, and back offices themselves or a dedicated team that can manage the technology for you, we think the trend toward technology adoption is great news.

It’s also good news for firms that are choosing technology to modernize their investment management. Our survey found that sponsors using technology reported getting commitments twice as large as those not using technology.

Fundraising isn’t the only area where technology makes a difference. “Technology has been a huge boost for us in terms of attracting new investors,” Ernest says. “About 35% of the investors in our most recent fund are new. In the past, we relied on investments from our existing investors, but technology has facilitated finding new investors as well.”

Another interesting finding from our survey is that 76% of respondents not using technology said that the investor presentations were the most time-consuming part of the fundraise process. Natalie says this is where technology made a huge impact.

I can say Juniper Square probably saved us an entire employee.

"It’s not necessarily one specific role, but in terms of the number of hours needed to do four to five deals a year, it actually saves that much time. And I can say that because I’ve done deals with and without technology. We chose Juniper Square because it’s so user-friendly. I can send out offering memorandums and get all my equity commitments. Once everyone is funded, I move them over into my investment entity and my controller takes over to send out K-1s and quarterly reports. It’s a huge time saver, especially when you are doing multiple deals every year.”

Ernest says Juniper Square has helped them meet investor demands. “At the property level, when someone comes to look at an apartment, there’s a good chance you will never see them again if they leave without signing a lease. You better be prepared to close the deal when people walk in, and that’s the approach we take with our investors. Our investors are busy so they request information during the evening, or on weekends, or when I’m traveling. I can easily respond to those requests using Juniper Square on my cell phone or my iPad. The ability to communicate quickly, efficiently, and effectively, and give investors what they need within minutes of asking is invaluable. It sets the tone for the relationship. And they tell their friends about it, and they reinvest with you, and their friends reinvest. It makes us look professional, and efficient, but more importantly, it delivers investors what they need, when they need it, no matter where they are in the country.”

Simplified subscriptions

Both Greenberg and Johnson noted how Juniper Square simplified the whole subscription process, from uploading documents to completing questionnaires, and reduced the time from commit to close. Natalie says, “The first time we used Juniper Square to handle subscriptions at MJW was a game changer.” Johnson agrees, “Every time we close a deal and our subscription process is still open, I get a handful of investors that want to put more money into the fund.” Before, that was a new paper chain with lots of documents. With Juniper Square, we literally can go in and, within a minute, change the amount and get the document out to them for signature. They sign electronically and the whole process is done in five minutes as opposed to three or four days. Being able to respond quickly and get them information when they ask for it is priceless.”

Finding deals

Johnson says, “If you’re out there working with the brokers and have a good network, you can find deals, but it’s not like the old days where you were just raking them in.”

During the pandemic, ApexOne met with brokers around the country to see what they were hearing and doing. “We confirmed developers were delaying decisions to exit their property, and some would need a buyer quickly. We called on a select sponsor with a full-time team assigned to us from Freddie Mac so we could close deals in 45 to 50 days. We have a healthy pipeline. Most of these deals weren’t on market, but they’re quality deals built in the last two to three years where the developer was just literally out of time. We found one distressed seller because a buyer backed out of the deal. The seller approached us and we closed the deal in 45 days. That property — a 2019 vintage — is throwing off an 11.5% yield right now.”

Greenberg thinks multifamily will stay in demand because it feels safer than hospitality, retail, and offices, which are a big question mark. “There’s been such an influx of capital and it’s not like we were short on capital before. With all that coming in, it’s really pushed returns down. Three years ago, a 20-plus IRR deal was standard for the deal level. Now, I think if you’re hitting a 16 IRR, you should be feeling really good because most of the institutions are targeting 12 to 14. We have the ability to source deals in ways that other people don’t. But we need to make sure our deals are truly value add and not adding on opportunistic risk — if something is a 16 or 18 IRR, it should still carry the same risk profile that it did before.”

Johnson says they are seeing the same thing. “It’s certainly tougher to make some deals work, but we’re working in a lot of the tertiary markets, or what I call regional business centers. We define those as towns like Pensacola, Florida, where it might not look appealing, but it actually supports a 17- or 18-county area with promising demographics. We’ve had great success in those markets. Some investors were concerned that institutions aren’t going to buy in these markets. We don’t need the institution to buy, that’s not who’s buying these properties. There are plenty of funds out there that want us to do all the heavy lifting to get things turned around, and do the value add. They clip the coupon for five or six years on the cash flow that we’ve helped them generate. And there’s no shortage of those buyers out there. If you can get them a 7% to 9% yield or a cash payout, they love that. And if they can collect that low to mid teen IRR on the backend, they’re ecstatic. Our distressed seller fund is targeting 16 to 18. And we’ve been able to find that, but it’s not like there’s 20 of them lined up to land on our runway. We have to go out and dig, and respond quickly to get deals done.”

2021 Outlook

Johnson thinks there will be a record amount of capital raised in 2021. He also says, “I think foreign capital is going to come flooding back into the United States because, despite our challenges, it’s still the safest place to invest. I think the high risk and returns are definitely going to be in the hotel and retail sectors.

I expect the office sector to recover much stronger than people expect, and multifamily and industrial are going to be the jewels for years to come.

Greenberg agreed with Johnson’s predictions. She adds, “I think there’s going to be a lot of opportunity in markets that historically have been incredibly strong, but have been getting crushed right now, like San Francisco, New York City, and, to some extent, Los Angeles because of moratoriums. At some point, with rents going down 20% to 30% in some of these major markets, there’s got to be some sort of correction, and I think that’s going to be a huge buying opportunity. Along with that, I think some areas that are 20 to 30 miles outside of big cities — like the inland empire in Los Angeles — are going to become more popular as more people work from home and need bigger spaces.

Click here to watch the full conversation.