Eagle Property Capital, a Miami-based manager focusing on the workforce housing market, is seeing more deals in its pipeline that it would be able to acquire on a leverage-neutral basis.
The shift is a significant one, coming after a long period in which the bulk of the transactions the firm was considering would have had to be acquired with negative leverage, said Rodrigo Conesa, co-founder and managing principal.
“Because cap rates on the workforce housing properties are now softer, we are moving to a point where acquisitions would be leverage-neutral,” Conesa said. “I would love to say that these acquisitions are leverage positive, but that is not possible because long-term rates are still high. But we are seeing leverage-neutral acquisition possibilities where we see value and upside, and I think that we can turn the neutral leverage into positive leverage within the next six to 12 months.”
The firm, which has acquired more than 40 properties totaling around 10,100 units since its inception in 2011, owns properties in Texas and Florida. Eagle Property Capital works with agency, bank and debt fund lenders to finance its acquisitions, Conesa noted.
“Right now, the better option for us is the agencies, which are significantly below allocation on their budgets this year and still have appetite to deploy capital,” Conesa said. “Banks are more cautious and are only lending on existing relationships. They are also certainly being more cautious in terms of loan proceeds.”
Eagle Property Capital invests via a series of commingled investment funds, acquiring garden-style apartments in need of renovations where rents are lagging relative to competitor assets. The firm makes its acquisitions with the goal of maintaining its properties as workforce housing and typically underwrites to a five-year hold, Conesa said.
In addition to its commingled funds, Eagle Property Capital has also structured programmatic joint ventures with institutional investors from California and Mexico, where the company has its roots. Its properties are located in Tampa, Orlando, Houston and Dallas.
“We target individuals who earn $45,000 to $80,000 a year, which is not the segment of the market where new construction is being geared toward,” Conesa said.
He added: “We have roots with Mexican and Latin American investors, and we often invest in communities where there is a significant presence of Hispanic communities because we feel like we are better connected to the people in the region. Additionally, this is a demographic which is growing quickly in the US and is also very prone to renting over owning.”
The firm’s investors are a mix of family office, high-net-worth, institutional and retail clients, and Conesa reports a divergence in which clients are interested in allocating capital right now. The institutional segment of the market is the most challenging.
“Equities were devalued significantly, and at the same time, interest rates were going up and inflation was out of control,” Conesa said. “Institutions are open to conversations, but they are still overweight to alternative investments, particularly real estate, and are taking a slower approach.”
Still, there is a broad consensus that the market is closer to the end of the current interest rate cycle. “There is now an expectation of a longer period of higher rates, but I don’t think we are expecting hikes more significant than what we are seeing now. This is already making pricing easier and makes for better debt sizing on new acquisitions,” Conesa added.