A Look at One Fund’s Strategy for Real Estate in Smaller Markets

Boutique real estate firm Edgewater has launched its largest private equity real estate fund to date. The $100 million Edgewater Real Estate Growth and Income Fund LP is relatively small compared to some commercial real estate industry mega-funds. Yet Edgewater views their business model as one that fits nicely into a gap in the market. They are targeting smaller metros that are bypassed by bigger investors, and their hands-on management helps uncover value-add opportunities in markets that tend to be dominated by fragmented ownership.

Originally founded in 2008 as an advisory company that was assisting lenders with distressed assets, they started out providing valuation services followed by receivership and trustee work on behalf of lenders. That focus led to opportunities to buy assets, and Edgewater began raising capital and structuring private placement and real estate funds in 2011.

WMRE recently talked with Edgewater’s founding partners Robert M. Brier and Ketan Vora to hear more about the firm’s investment strategy and the opportunities they are finding to acquire assets in smaller metros.

This interview has been edited for style, length and clarity.

WMRE: What is your firm’s history with private equity real estate funds?

Ketan Vora: We initially started with private placement deals. Our first fund was in 2013 with roughly $7 million in equity that was deployed in about two years. Our second was a 2015-2016 vintage fund at about $13 million. The third fund was a $30 million fund that we still have a little dry capital to deploy. Our $100 million fund is the one that we launched just before the holidays in Q4. So, over time, our accretive capital is slightly over $50 million. We also have some joint venture partners on the GP side that we work very closely with.

WMRE: Who are your investors or capital sources?

Ketan Vora: All are accredited investors, primarily high net worth individuals that are very successful in their careers, as well as individuals that have operated large businesses and have either sold them or continue to operate them. So, we have a really good diverse mix of investors.

bob-brier-web.jpgRobert M. Brier: I would add that we have a 70+ percent retention rate on all of our investors. We are very happy with the reinvestment from existing investors. We continue to raise capital from them and also from their references and word-of-mouth.

WMRE: What do you attribute that retention rate to?

Ketan Vora: It’s a combination of factors. It starts with trust and transparency. That is really the most important part of investing when you are dealing with other people’s money. In part because of our professional backgrounds, we are very comfortable with the fiduciary role of guarding other people’s assets in the receiverships that we do on the advisory side of our business. Transparency also is important when you hit some bumps. You really have to be transparent on what the game plan is. At the end of the day, investors invest with you not just because they like you and they trust you, but they also expect a return. We have been able to execute on what the plan is for the investment. We stick to the investment criteria and don’t digress from it. That along with our operational background has allowed us to deliver the returns.

Investors also like our unique strategy. We are diversified within the overall sector of real estate across asset types. We carry some renovation risk, but we don’t do any ground-up development. So, we don’t have any stabilization risk. It’s a diversification approach, and it’s an approach to access markets that are very fragmented.

WMRE: What’s your overall investment strategy?

Ketan Vora: This current fund is a value-add fund, and it is a patient money fund that will be investing in income-producing real estate assets. Some of these investments will have, as we call it in the business, some hair on it and assets will need to be repositioned. By repositioning, I don’t just mean from a renovation standpoint, but also from a business approach, business plan or personnel with a heavy focus on process and support. In some cases, that means introducing an element of social media, if they don’t have it, and creating an impact through better marketing.

WMRE: What types of assets and geographic markets are you targeting?

Ketan Vora: The firm has invested in hospitality, neighborhood retail, office, multifamily, mixed use, student housing and industrial. We typically like to have a long-term view on things. So, we’re not flippers. We make a core operational impact on the property and on the community in a positive sense. And because we are in secondary and tertiary markets, the community involvement is very near and dear to our heart. Currently, we are active in Pennsylvania, Georgia, Florida and Alabama, and we have previously worked, in New Jersey, Delaware and the Carolinas.

WMRE: That seems like a pretty broad canvas. What’s your strategy for finding deals?

Ketan Vora: We are focused on the Mid-Atlantic down south. We have a “land and expand” strategy. So, what we do is find a good asset to break into a market. If it is a market that we already know, through previous investment or through our advisory business, then it becomes more beneficial for us to continue expanding there. We like communities that have various demand generators, regardless of which asset segment we are looking at. We shy away from markets that have one employer that dominates the market. Typically, we look for county seats and jurisdictions that have a hospital system, a school system, diverse businesses and a mix of leisure, retail services and tourism. You need those multiple facets to really manage your risk. If you have the diversity of demand where you are, it really allows you to weather the ups as well as the downs.

Robert M. Brier: The investment thesis that Ketan has outlined we have been implementing for more than 10 years. So, this new fund is a continuation of the same thing we’ve been doing—getting invested in these communities, expanding on the businesses that we buy, targeting the same returns and making good on the returns for investors. We are comfortable with the size of the fund and our ability to make deals through our network of brokers, bankers and previous sellers. People know they can count on us to close on a deal versus just throwing a number at the wall and seeing if we can finance it later. Our underwriting and hands-on management gives sellers confidence that when we make an offer and put out an LOI, we’re serious and want to close and we’re not just looking to re-trade.

WMRE: Some view cities like Atlanta and Tampa as secondary markets. How are you defining secondary markets?

Ketan Vora: To your point, we view Tampa and Atlanta as primary markets. In Georgia, we are at Stone Mountain. In Florida, we’re in Tallahassee, which we think fits in the secondary bucket. We’re also in tertiary markets such as Punta Gorda, Apalachicola and Destin.

WMRE: What are you finding for investment opportunities in those smaller markets?

Ketan Vora: Typically, what you find is very highly fragmented. Assets are owned primarily by local operators that have certain limitations because they have not built out their platform or their team to scale across multiple markets. So, their bandwidth—from capital to execution to leverage to expansion capabilities—is fairly limited. These are markets where you typically compete with a lot of local operators and businesses, but they don’t have the scale along with the firepower of equity or debt relationships that we have with lenders that make us a very formidable buyer that can execute. The other part of it is that we are in markets that are too small for the big guys to play in. Trying to build out an infrastructure to justify the volume of deals becomes too long of a strategy when you have to deploy $1 billion at a time.

For us, doing the “land and expand” strategy allows us to pick different asset classes in and around a market and then grow into another market. As an example, we entered the Panhandle of Florida through the acquisition of a small boutique condo hotel project. We expanded to another acquisition in Pensacola and then were able to get into Tallahassee with a couple of smaller multifamily and student housing acquisitions. We have built on that with retail, office park and hotel acquisitions. We opened an office in Tallahassee, which then allowed us to expand into Destin, which bridged the gap to go into Mobile. It becomes very easy once you have infrastructure sprinkled 1.5 to 2 hours from each other to start leveraging resources, including human and purchasing.

WMRE: What’s the average size deal you are looking to acquire?

Ketan Vora: In the new $100 million fund, we are looking at $5 million to $20 million on the acquisition price, although there are other costs that go with it in terms of renovations and repositioning.

WMRE: Do you have a targeted return you are looking to deliver for investors?

Kean Vora: Obviously, we can’t promise returns, but we typically will not take on a deal unless we are 20+ percent IRR, regardless of the holding period.

WMRE: It’s still early days for this fund, but what kind of acquisition opportunities do you expect to find?

Ketan Vora: It’s a mix. There are portfolio acquisitions coming up where certain people are looking to dispose of multiple properties. That is why we have seen the need to have a larger fund that can manage those opportunities. The other opportunity we’re seeing is people who have owned properties for a while, and they are getting older and looking to make their estate less complicated. What they are looking for is certainty of close and also people who are going to be taking care of the asset. If there are employees, they also want to make sure they are treated correctly. That doesn’t mean automatic employment, it’s more about demonstrating a professional way of running things and being a participant in the community.

We are seeing some early peeks of distress that will start manifesting in certain pockets as a result of COVID and the fallout from it. Some of these businesses are running out of equity capital and the lender is starting to come in where there is no turnaround in sight. Some owners have now been dealing with COVID for what is now starting a third year. So, there is some fatigue setting in, and that will come into play with some of the reserves running out. We’re at the early stages, but we feel that we are very well-positioned to take advantage of it. Lastly, through our advisory business, as we start picking up advisory business related to distress, that will allow us to get a pipeline of deals that we are not conflicted on.

Robert M. Brier: We also see bigger real estate players selling non-core assets to get out of a market, oftentimes because they are undermanaged. We have the opportunity to go in and breathe new life into it and make some modifications. We network with those players, and a lot of those deals come to you off-market when you are known to be a reliable buyer that is well financed with good underwriting.

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