Asset Management in Practice
What is Asset Management?
Asset management refers to the ongoing management of investments, or a portfolio, on behalf of investors. Broadly speaking, this means monitoring, analyzing and assessing each investment from inception to realization, with the goal of developing sound and economic strategies to mitigate risk exposure. While you may associate the term with an investment advisor managing your portfolio of stocks and bonds, asset management means something slightly different at EquityMultiple, where investments are made into discrete, privately-held commercial real estate assets.
While real estate investing involves the analysis of macroeconomic and market-specific fundamentals as well as intricate financial modeling, it remains a fundamentally human endeavor. Successful real estate investors forge and leverage strong relationships with joint-venture partners consistently over time. As such, much of asset management in private-market real estate investing is maintaining regular communication with sponsors to identify potential risks, evaluate asset performance, and collaborate to execute the best asset and portfolio strategy. This article takes a general look at particulars of real estate asset management practice, and how EquityMultiple’s Asset Management team operates.
Asset Management Practice in Real Estate Investing
EquityMultiple takes an institutional approach to asset management, and our team has added senior, experienced staff to support this practice.
Real estate asset management is a relationship-driven process. In addition to structuring as many protective measures as possible in each investment, we actively engage with sponsors early in the transaction process. This begins during the engagement process, and continues through the lifetime of the investment (and beyond). A positive relationship with a sponsor is a two-way street, and may manifest in the following ways:
- Connecting the sponsor with additional local operators, lenders, or other sources of financing to help the sponsor pursue better outcomes for the investment;
- Offering tactical and strategic advice and collaborating to carefully review and analyze each property’s operational and financial performance – working with the sponsor to comprehensively underwrite and manage the investment;
- Helping sponsors navigate local permitting strictures and other legal idiosyncrasies;
- Negotiating terms that are attractive for EquityMultiple (and our investors) as LP investors, while aligning with the sponsor’s interest in the project, and working together to maximize the value of the investment throughout the investment’s holding period.
The EquityMultiple Asset Management Approach
EquityMultiple currently manages dozens of assets on behalf of our investors. As our portfolio continues to grow over time, we will be scaling up our asset management infrastructure accordingly.
To this end, we have added proven talent and investment management experience to our team. We recently welcomed Henry Kwong as Senior Director of Asset Management. He is responsible for managing EquityMultiple’s growing investment portfolio and brings a wealth of institutional asset management expertise to the company. Henry joined EquityMultiple from Clarion Partners, where he helped manage a $4.0 billion institutional multifamily open-end fund. Prior to Clarion, Henry worked at MMI Advisors, a boutique real estate advisory firm that he co-founded. He also held portfolio management positions at Cerberus Capital and ING. Henry started his real estate investment management career at Deutsche Bank.
In the past six months, we’ve built out the asset management team, established necessary protocols, and worked toward creating higher reporting standards with all sponsors. In many cases, we’ve begun to incorporate these standards and protocols as contractual obligations that are explicitly stated in our legal agreements with sponsors. We’re also in the midst of enhancing our reporting capabilities by standardizing reports, improving our data collection process, and integrating new technology.
The team takes an active approach in the management of each investment from initial negotiation of terms, through sponsor onboarding and establishing points of contact, to ultimately exiting the investment. We review and analyze sponsor reports on a regular basis to ascertain where projects are performing or underperforming and, where necessary, establish a strategy with the sponsor to either sustain performance or correct underperformance. EquityMultiple has also created an internal focus group of senior investment personnel to review our development projects and underperforming investments where asset-level issues are vigorously discussed and strategies are formulated. We believe this ensures accountability from our asset managers and successful execution of strategy.
An Illustrative Example: EquityMultiple’s Asset Management Team At Work
Preferred Equity In The West Hollywood Townhomes Development
EquityMultiple investors participated in a preferred equity investment for the development of luxury townhomes in West Hollywood, CA.
The target development cycle was 24 months, with a target net current annualized return of 10.0% and an accrued return of 7.0%, for a total target return of 17.0% to EquityMultiple investors.
This Sponsor specializes in developing architecturally significant, eco-friendly homes at attractive prices throughout Los Angeles. The Sponsor focuses on small-scale condo and townhome development and redevelopment. The firm is experienced enough to efficiently navigate the local entitlement process and achieve cost efficiencies through vertical integration.
The Sponsor’s business plan was to utilize the Los Angeles County Small Lot Ordinance (SLO) to demolish an existing single-family home and to subdivide the property into five separate fee-simple parcels. After closing the transaction in January of 2018, the Sponsor immediately ran into delays in acquiring necessary approvals from the City of West Hollywood. This didn’t entirely surprise us, given how strict the City is with development or redevelopment. Given these delays, the Sponsor began seeking other ways to expedite the project and completed final renderings the following week.
In the midst of the development, the City of West Hollywood introduced additional ordinances to amend the existing guidelines on Small Lot Subdivisions. The new guidance would require the Sponsor to redesign the townhomes and create new plans. It became apparent that the amendments would cause substantial delay and additional project costs, and increase the investment’s risk profile substantially. While we anticipated delays and increased costs in our stress testing during underwriting, changes in zoning and regulatory challenges are difficult to assess and nearly impossible to mitigate entirely.
Given the material change in the investment risk profile and the improbability of the Sponsor meeting the criteria for an extension upon the initial redemption date, we concluded that the best strategy was to exit the investment.
After a few weeks of deliberating and negotiations, EquityMultiple and the Sponsor agreed to an early redemption of our Preferred Equity investment at the same return as our original underwriting, resulting in a net 19.3% IRR and 1.2x multiple to investors.
For further examples of exits on EquityMultiple investments and the role the Asset Management Team played, please refer to our Track Record utility.
The Bottom Line
While asset management provides clear added value to passive investors, many platforms in the so-called “real estate crowdfunding” space do not have in-house asset management teams.
EquityMultiple is dedicated to mitigating investment risk on behalf of investors, and our Asset Management team is key in supporting this objective. For more on EquityMultiple’s practices, and to learn more about investment offerings, please create an account or schedule a call with our Investor Relations team.
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