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Interstate Equities tracks lender shift towards full-company, ESG analysis

The multifamily specialist sees more differentiation from lenders.

Interstate Equities Corp, a Los Altos, California-based multifamily specialist, is seeing lender differentiation around the whole business of a company, including fiduciary success and ability to embrace and implement ESG principles.

“There is more underwriting of the firm by lenders who are now looking more at the fiduciary success of the firm rather than just giving all borrowers the same rates,” Marshall Boyd, co-president and CIO of the private equity investment company, told Real Estate Capital USA. “Lenders are increasingly picking the firms they want to work with and underwriting true credit.”

The company, which is deploying capital from its fourth real estate private equity fund, is also starting to see more lender interest in borrowers that incorporate ESG into their investment strategy.

“There are benefits for incorporating ESG principles into our investment philosophy, but we don’t yet see it as a huge differentiator,” Boyd said. “We’d love to get more credit for that.”

Investment strategy

The company invests in value-added multifamily communities in California and Washington, with an emphasis on workforce housing. IEC has properties in 19 cities that include the San Francisco Bay Area, Santa Barbara, the greater Los Angeles area, San Diego, and the Seattle region. IEC went into 2021 thinking that it would be a net seller but ended up being a net buyer.

“We came out of 2020 and thought we wanted to play some offense, make sure we are active and taking advantage of opportunities,” Boyd said. “Since the beginning of 2021, we have completed just over $1 billion of deals – 10 purchases and five sales. For us, transactions tend to be highly opportunistic.”

Seven of the 10 properties the company acquired last year were from the assets’ original owners, high-net-worth investors who made the decision to move forward with a sale. “Those are the types of buildings where we can really improve the experience for the residents and really differentiate our properties,” Boyd said.

IEC has availed itself of green lending programs from Fannie Mae and Freddie Mac and has also worked with lenders like Invesco, where it obtained a loan on a three-property portfolio. As it has gone into the market to seek debt, IEC’s portfolio occupancy levels or 95 percent or higher demonstrates to lenders rent levels that support the underlying properties and future growth, said Julia Boyd Corso, co-president and chief operating officer.

“Because of our operational strength and fundamentals in this product, we continue to see strong interest from lenders because the properties service the debt so well,” Corso said.

Looking ahead

ESG has been infused in the firm’s culture since its inception forty years ago and is part of its hiring, training and culture building. “We are very reverent to what created our playbook. We started out as a mom-and-pop company which was also quite entrepreneurial and grew to a private equity manager,” Boyd said.

The company, with an average deal size of 100 units and vintages of 1950 to 1990, has raised its first private equity fund in more than 20 years with the aim of continuing its core mandate of providing high-quality housing for tenants which are unable to afford single-family homes.

IEC’s social programs include working with residents to customize properties to better suit the individual needs of each demographic, with some residents voicing support for amenities like a shared kitchen space and others preferring conference or movie rooms, Corso said.

IEC has a director of ESG that works closely with the firm’s asset management and investment teams, including implementing strategy into the business plan for individual properties, creating strategic action items for the team, and working initiatives that range from reducing carbon footprints to improving the resident experience from a social perspective.

“We pursue assets people love to live in and we spend significant capital improving the assets and the infrastructure,” Corso said.

 

 

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