Boston-based Kingbird Investment Management, the real estate arm of the 100-year-old Grupo Ferré Rangel family office, is starting to see the opportunity to provide growth capital to operators who need to fill in gaps in the capital stack. But these opportunities to provide equity, preferred equity and even potentially mezzanine debt are likely to unfold slowly.
“We are starting to see glimmers of mispriced risk. And anytime there is market dislocation, it’s a great time to invest,” said Ken Munkacy, senior managing director. “We haven’t gotten to a price discovery moment yet and I believe it will unfold slowly.”
The firm invests at all levels of the capital stack, including equity, preferred equity, GP, co-GP and LP investments. It is now considering making investments in mezzanine debt as well, a strategy that would follow its research-driven, fundamentals-based approach that is focused on the gaps between supply and demand.
It is part of the firm’s core philosophy to be flexible in its approach to the capital stack, which has led Kingbird to consider structured special situation investments. “When you look at how distress creeps into the system, borrowers are spread thin, and lenders’ debt is more expensive. We view this as providing growth capital to local operators. We are filling capital gaps for sure, but we are generally not passive investors.”
Munkacy said: “The challenge is to figure out where the pricing is going to be. Where the capital needs are more pronounced, there is uncertainty about the value stream in which you’re invested. There won’t be a lot of trades done at this juncture.”
As a family office investor, the firm has always taken a very prudent approach that has included an emphasis on capital preservation above all use. “Our mantra was, above all, protect principal and then get the best risk-adjusted returns that you can for that capital,” Munkacy said. “We work to protect the downside a lot and we have ways of structuring our capital stack and investments for that purpose.”
Thematically, this means the firm also follows population growth driven by factors that include tech, education, and medical-related industries. “Our research shows those jobs are stickier and, in times of downturns, they lose the least and recover the fastest,” Munkacy said.
“That translates into an investment philosophy where we like Atlanta, but not everywhere – there are only two zip codes in the city that work for what we want to do,” he said. “We are not just going to throw a dart.”
Munkacy’s career has spanned the Resolution Trust Company days of the 1980s to the current downturn. “For those of us who have seen this movie before, it is part of the cycle. And like any cycle, it is a little bit of the same and a little bit different,” he said.
The market continues to reel from the shock of the number and size of the interest rates hikes seen this year, with Munkacy noting even seasoned real estate professionals were not entirely prepared for the velocity of increases seen since March.
“There are many people in the market who came out of grad school following the global financial crisis into an ultra-low interest rate world, where rents always increased 6 percent and the trees grew to the sky – it was that kind of mentality,” Munkacy said. “But for those of us who have been around for long enough, we remember the times when there were a lot of workouts, major financial failures and cracks in the capital stacks that led us to use more caution.”
The firm is a long-term believer in the US housing market, with Munkacy citing secular and structural issues that have led to an underproduction of housing across the US since the end of the global financial crisis.
“The demand will outpace supply and there are structural reasons for it – it comes down to regulatory, labor reasons and construction costs,” he said. “The system isn’t motivated to provide enough units or to provide enough affordable units for the part of the world which makes $45,000 to $90,000 a year.”
The firm will look to investments in multifamily and beyond as it works to deploy capital in the coming year, with Munkacy noting that at some point banks will start writing down loans. There could also be unexpected partnerships or white knight general partner takeovers, all of which have already been happening on a limited basis as borrowers seek to fill gaps in the capital stack.
“We will likely see a continuation of that in 2023 and, particularly toward the end of the year, we will see more of that,” Munkacy said. “At this point, we’re not pencils down, but we’re doing our homework and research to be ready.”