Advalurem Group wants to double its portfolio over the next year by providing equity for mid-market commercial real estate investments in secondary and tertiary markets from which larger, institutional capital may shy away. The firm targets transactions that require no more than $15m in total equity, translating to property values of less than $60m with moderate leverage, over larger deals in primary markets, Gabriel Pozo, founder and principal, explained. “Our view is that there is a tremendous amount of capital flow toward gateway cities and trophy assets. It has bid up pricing so much so that there is a disconnect with regards to return and risk.”
The company’s view is that mid-market transactions in secondary and tertiary locations can offer attractive pricing and better returns than larger deals in primary markets. “We’re not afraid to go to secondary or even tertiary markets as long as they possess a compelling economic story and strong demand drivers,” Pozo said. “It requires local knowledge, in-depth research and confidence in our operating partners, but we are disciplined principal investors and very much target markets that, regardless of their size, enjoy the growth characteristics of larger markets.”
The firm begins at the macro level, determining which of the top 100 US metros are in recovery, which are peaking and which are stagnant. From there, Advalurem looks at demand drivers in each market and moves to micro-level research that includes specialized knowledge of its operating partners. “We are willing to roll up our sleeves, do our homework and say, “This has attractive investment merit,” Pozo said. “We’re not trying to be trailblazers, but we want to be a step ahead of some larger institutional players, with the option to package assets and sell them over time to public or private REITs, small institutional funds or other regional players.”
Advalurem most recently provided sponsor equity for its operating partner, Block Real Estate Services, for the acquisition of Ranch at Pinnacle Point, a 392-unit multifamily community in Rogers, Arkansas. The transaction was completed along with Balfour Beatty. Advalurem liked the transaction given its positive view of Northwest Arkansas, which has seen strong employment and population growth with its economy increasingly driven by the University of Arkansas and the three Fortune 500 companies anchored there – Walmart, Tyson Foods and J.B. Hunt. “[Northwest Arkansas] has seen steady growth, and all of these demographic trends attracted us to the area, knowing that the economy is performing extremely well, unemployment is low and job creation is high,” Pozo said. “The area possesses many of the characteristics that you see in larger markets such as Austin or Raleigh, which really drew us to this location.”
The property is 99% leased and was sold with an existing loan in place that has a restrictive prepayment term. By assuming the owner’s existing debt and prepayment terms, more equity was needed than what would otherwise be required in a typical transaction. “A lot of potential buyers were not interested for that exact reason,” he said. “Often, yield-oriented investors want to put the least amount of equity in a transaction to boost income returns, but that’s not how we look at real estate. We want to stay institutional in our approach, yet nimble and entrepreneurial in our execution.”
Advalurem plans more transactions similar to this one in 2015 as it continues to diversify and grow its portfolio. “We are now concentrated in multifamily and office, but we’re hoping that by the end of the year, we will add other property sectors to help further diversify our portfolio,” Pozo said.