EquityMultiple’s Associate Director of Investor Relations, Rada Milenovici, discusses the company’s history, value proposition to investors, and track record to date.
Rada also touches on modern portfolio theory in the context of EquityMultiple and passive commercial real estate investing.
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Welcome to Modern Real Estate Investing
Hello and welcome! My name is Rada Milenovici, Associate Director of Investor Relations at EquityMultiple. We very much appreciate your interest in learning more about EquityMultiple. My objective here today is to provide an introduction to our platform and tell you a bit about us, our investment process, run through a recent transaction, and finally without touch a little bit on modern portfolio theory.
To help kick things off and frame this discussion, I’d like to start out by saying that our general view is that most individual investors significantly underweight commercial real estate in terms of their portfolio allocation. If we step back and take a snapshot of some of the largest pension funds and endowments we can see that nearly 30% of their portfolio is dedicated to alternative investments such as real estate.
Helping You Build a Stronger Portfolio
Individual investors typically have less than 5% invested in alternatives. Clearly there seems to be a little bit of disconnect here. Our thesis is that passive real estate investment provides downside protection and better portfolio diversification. EquityMultiple’s mission and vision is connecting individual and accredited investors to pre-vetted investment opportunities from experienced real estate firms all across the country. We offer diversification not only by adding commercial real estate exposure to your portfolio, but also diversification within a particular asset type, geographic region, or exposure to a particular part of the capital stack – as we call it.
In terms of who we are, EquityMultiple was founded in February, 2015 and launched our very first deal in September of that year. We are the only online investment platform backed by an established real estate company called Mission Capital. Our founders looked to partner with a company that really understood the bricks and the sticks, rather than a venture capital firm like many of our competitors. Mission Capital is a tech-enabled commercial real estate capital markets firm with a focus on asset sales and arranging debt for large institutional funds and developers all across the country. The importance of this to you as an investor is that we can leverage their experience and national rolodex of sponsors and lenders to help provide the best investment opportunities.
At EquityMultiple our team brings diverse industry experience from real estate finance, private equity, investment banking, law, marketing, and technology. Our co-founders Charle Clinton and Marious Sjulsen launched EquityMultiple with a shared vision of transforming real estate investing through technology and leveling a playing field by allowing individual investors access to institutional quality real estate and streamlining the investment process. EquityMultiple is deeply committed to transparency, rigorous underwriting, and intimate investor support. We are deeply committed to transparency and providing best-in-class customer support. We also take it very seriously that investing involves trust and and want to make sure we earn that trust every time we interact with you.
How it Works
Our real estate team provides a rigorous screening process to source institutional quality assets from high pedigree sponsors who are tested and also have a proven track record of realized returns. We conduct all due diligence by vetting the sponsor, stress testing the financial models, studying the comps, and basically providing our investors with strong risk adjusted returns. To put some goal posts around these metrics: roughly one in twenty opportunities get through the funnel. We definitely take the quality over quantity approach when it comes to selecting investments onto our platform. What’s important to note here is that every project whether it is equity, preferred, or debt is sourced from an experienced sponsor or lender. Ultimately, EquityMultiple is sitting between you and the real estate company. We’re responsible for finding the investment, underwriting it, doing the asset management, and making sure the business model comes to fruition.
Equity Multiple Advantage
We get a lot of questions from sponsors and investors about how we differentiate ourselves from some of the competitors out there. First and foremost, we think of ourselves as a real estate firm that uses technology to empower our business. While technology is important to everything we do on the platform to viewing investments, vetting, and underwriting the deals in the background, we’re a team of real estate professionals who are more or less simplifying the investment process. Our Investor Relations Team takes pride and being attentive and promptly answering any questions. Our Senior Team can help provide support over the phone through our app chat bubble on the lower right hand side of the screen or also through traditional email.
I spoke a little bit about our due diligence process – we definitely carefully underwrite each deal and vet the sponsor. Our in-house asset management oversees all aspects of portfolio management and we give quarterly updates to investors on distributions, renovations, leasing, occupancy levels, and also any variances in the pro forma. There are some other platforms out there that offer more of a managed fund approach- kind of like REIT in that the investor doesn’t have any discretion over property selection and our product offers individual asset syndication which gives the investor total autonomy of the selection process. We allow investors with minimums as low as $10,000 to accredited investors.
Currently we offer three different investment products. A range of property types and geographies to reach the ultimate goal of diversification. This would probably be a good time to mention that there’s a wealth of information on our website under the resources page. We recently posted an updated learning series titled Introduction to Commercial Real Estate that takes you through the fundamental such as macro and micro divers of value, the anatomy of the deal, and some more advanced topics.
Three Ways to Invest
Here we have a visual of the capital set. I’m going to touch on some high-level points of differentiation and starting from the bottom we see debt. Debt is secured by mortgage or deed of trust. If the borrower fails to pay the lender, the lender can take title on the property. This greatly reduces risk on the principle invested because at the very worst the lender owns the property and will look to maximize the value by selling the property or selling a non-performing note. Our target debt rate of return to investors is usually 7 to 12% which is paid monthly and we’d like to stay under the 75% loan to value.
A particular project moving down in seniority of payment we have preferred equity. Preferred equity holders have more rights than traditional equity holders but are still limited compared to a senior loan. Preferred shares generally have a distribution that must be paid out before equity. The returns are somewhat in the mid-teens for what’s usually a one to three year hold, depending on several variables. These returns are often broken up into current paying distributions and accrued that is paid at the end of the whole period. Current preferred distributions is paid ongoing whether that’s monthly or quarterly and the accrued portion is paid upon called the liquidity events such as a sale or a refinance. We typically go up to 85% of total capitalization on the capital stack on a preferred.
Lastly, the riskiest, most profitable portion of the real estate deal is equity. As an investor in equity your risk is the greatest because every other tranche of capital is entitled to get paid before you do. However on the flip side of that, if the property does remarkably well equity investors usually have no cap on their potential returns. It’s worth noting that common equity deals typically have significantly longer hold periods than senior debt or preferred equity investments on our platform. This is because the sponsor will have more time to realize their business strategies such as a value-add multifamily when leases roll on a garden style apartment complex.
In summary, understanding these different investment structures and how they impact both risk and return is a key step in making real estate part of your investment portfolio. For risk tolerant investors: your exposure to real estate equity may be more appealing, however, for risk averse investors who prioritize wealth preservation: secured debt may be more appealing in that case.
EquityMultiple Sign-up Process
Next, I want to to move on and spend some time going over the signup process and onboarding. Our technology and operations team is always working tirelessly to improve the user experience, both what you see and also on the back end. The entire sign up process can take as little as five minutes to complete.
It’s important to stress that we don’t want to rush through this process. Of course, our lines are always open in the event that you have a question or run to some snags feel free to reach out. It’s also worth noting that you can invest in many forms such as an individual account as an entity, as a joint account, IRA, or a trust.
If we take the default on an individual account, the first step is to prequalify. That’s where we obtain some information from you such as your email, name, address, and confirm that you are a US citizen. Then we’ll move on to some financial verification questions such as self certifying that you are accredited and suitable to invest in products on our platform. We do require that you have a valid ID that submitted and uploaded onto our platform and we also require you to fill out a w-9. Lastly we would want you to link a bank account which would allow you to be ready to fund an investment that fits your investment criteria. You can evaluate live deals and browse past investment opportunities by clicking on ‘invest’. There you can view an offering memorandum. I plan to guide into one of those a bit later.
In terms of the investor journey, it’s really broken down into 3 main steps. First of which is that you can indicate interest by allocating a certain dollar amount to an offering. Next, you would pledge by signing the subscription documents and of course we encourage you to review all the material before making this decision. We have our investor relations team that can assist you with that. Finally, you would fund this investment through various methods such as wire ACH or a check. Once that is complete you can monitor your investments and get specific updates on each of your investments on the ‘my portfolio’ tab. There is a nice user face that shows your principal and also the distributions that are paid out either monthly or yearly.
We get a lot of questions about our performance of past investments and what they look like on our platform. Our top goal is to provide you with transparency into past offerings and make that available to our investors at all times. Thus, we have added a track records section to our site. There we highlight the cumulative performance of equity multiples portfolio to put some metrics behind it today EquityMultiple investors have funded 51 million dollars across equity preferred and debt offerings. This 50 plus million dollars represents more than 800 million dollars in real estate value and we certainly expect a number to top a billion dollars in the next few months. As mentioned, we have roughly a 5% acceptance rate for the deals that we see versus the deals that actually get posted onto our platform and become available to our investors.
We have done 53 investments across 19 markets and nine deals have gone full circle. There are two deals at the moment that have outperformed, two that have under performed, and five that have performed in line with our expectations and pro forma. A deal can perform less than expected if events arise such as construction delays, cost overruns, or some unexpected expenses such as an HVAC unit breaking down. Overall, we are quite pleased with how the investments have performed.
On equity deals the average rate of return is net 17% IRR to investors. Of the investments that are cash flowing to investors, meaning distributing on a quarterly or monthly cash basis, the cash on cash return is more than 8% which does not include any upside on a resale or in the case of equity or preferred. We have no loss of principle but don’t want to give you the impression that we haven’t had any issues. Of course, these investments can under and over perform expectations. However, I will say that it is a testament to the selectivity with our sponsors and projects so that we continue to see good results with our partners and ultimately that passes through to our investors.
Next, this slide shows investments on our platform or otherwise known as our portfolio. As you can see they range in terms of property types, location, and structure, If you’re interested in seeing more information on these projects or any other offerings you can log on to the app and go to invest page and we have all our deals on the invest tab. Here, you can get an idea on projects we have successfully funded in the past.
The yellow dot sizes here correlate with the concentration of our portfolio and what you’ll see is higher concentrations of primary markets and in 18 cities that usually have more robust employment metric and higher migrational patterns into these cities. Although you’ll see that a good portion of our portfolio has equity exposure. We are really focused lately on offering more preferred equity and debt deals. The reason for this is that we’re getting a little bit late in the cycle going on to a ten-year bull market. That said, we’re trying our best to insulate our investors and one way to do that is not only by picking high quality sponsors but also being a little more conservative as to where in the capital stack. I just want to point out and highlight that diversification can be achieved not only by commercial real estate exposure but also diversification within real estate such as asset tight geographic region as well as where you are in the capital stack.
Let’s walk through one of those offerings. This is one that was live on the platform recently and was funded in a few hours we funded this 1.3 million dollar preferred offering for a triple net lease property in Jupiter, Florida. As always, we look for strong sponsorship and this particular entity had a strong experience track record of managing a portfolio and pipeline of over 500 million dollars. The proceeds here will be used upon the acquisition. In terms of the property, it’s 100% occupied by a multi-billion dollar Data Solutions conglomerate. In this case, the property is occupied by one single tenant so there is some concentration risk.
That said, the parent company is providing a guarantee which alleviates some of this risk. There is also a long term lease in place that extends well after our target hold period of 15 months and we’re going up to 90% of the total capitalization of the project with 60% LTV being a senior loan provided by National Bank. The current in-place lease is an attractive basis: $12.50 per foot versus current comps in the market of $13 in the area, so there’s definitely some upside potential. In terms of the returns the investment offers a 14% annualized preferred return which is broken up into a 9% current paid quarterly from the property cash flows and then a five percent of crew paid when the property gets sold.
Private Transactions and Modern Portfolio Theory
Next, I want to dive in and define modern portfolio theory and alternative investments and cover why that’s important to investors such as ourselves. Without getting too detailed, modern portfolio theory refers to quantitative practice of asset allocation that maximizes return for a portfolio while holding risk constant. For context, we’ve seen the market experience heavy volatility lately and give up a lot, if not all, returns in 2018. I don’t have a crystal ball, however, generally speaking public market valuations are driven in part by trading activity and sentiment. Fluctuations in the market are often a byproduct of news, interest rates, maybe corporate profits, repurchases, and there could be an activist hedge fund that is looking to cover a short position. The flip side is that commercial real estate prices are mostly correlated with fundamentals such as job growth, supply, absorption, household formation, and more macro drivers. It’s important to know that alternative private investments are often locked up for a longer time. Unlike stocks which are usually more liquid and sold real time, one could say that the current market volatility could present at timing opportunity for investors to consider increasing their exposure to commercial real estate from public markets and become a little bit more insulated.
That does it for today’s webinar! Thank you for taking the time to listen and for your interest in Equity Multiple. If you are interested in learning more about us or any of our investments please feel free to reach out at any time. We are happy to speak with you and answer any questions.
Speak with our Investor Relations Team:
(646) 844- 9918