Canadian real estate investor Ivanhoé Cambridge and Los Angeles-based residential specialist Mount Auburn Multifamily see a strong opportunity to provide preferred equity to US multifamily developers in fast-growing secondary markets.
Earlier this month, the two organizations launched a programmatic joint venture focused on originating preferred equity to fill the gap between sponsor equity and senior mortgages, according to Charles-Antoine Lussier, a senior vice-president at Ivanhoé Cambridge, the $65 billion Montreal-based real estate subsidiary of pension fund manager Caisse de depot et placement du Quebec. The partners like the risk-reward profile of preferred equity, which typically offers a higher yield than debt and is in a more secure part of the capital stack than a common equity investment, he said.
The venture will allow Ivanhoé Cambridge to diversify and expand its roughly $12 billion residential portfolio. The partners will target conventional, ground-up developments in the Sunbelt, with an emphasis on properties that are in business-friendly states with a high quality of life and a low cost of living. Rents will typically represent less than 30 percent of area median income, Lussier noted.
“It is interesting to take a lending approach to some projects in regions where we think we can take fewer risks for a good alpha on returns,” Lussier told affiliate publication Real Estate Capital USA. “[This venture is] not like a bank, lending and pouring out equity. It is taking a position in some projects that we like, and we would feel comfortable owning if things did not go well.”
A typical deal for the venture would be an institutional-quality class A development of 200 units or more in a suburban location. The preferred equity investments would make up about 10 percent to 20 percent of the capital stack. The partners declined to discuss targeted returns.
“[This is] a good cushion if the market turns to protect our investment,” Lussier said, noting that the borrower likely will have about 20 percent to 25 percent of equity in a deal. “We are a pension fund, and our goal is to bring good returns to our depositors.”
Boots on the ground
Ivanhoé Cambridge and Mount Auburn started talking more than two years ago about the potential for a partnership. The two firms were attracted to opportunities to step in and originate preferred equity stakes as construction lending has pulled back and development has accelerated, according to Matt Pavlovich, an executive vice-president of acquisitions at Mount Auburn.
In addition to diversification, there were two strong pulls for Ivanhoé Cambridge: Mount Auburn’s geographic focus and the positive supply-demand fundamentals of the US multifamily market.
“Mount Auburn has a proven track record. It is not a nascent group anymore,” Lussier said. “This really bolsters our current portfolio in terms of reach and diversification and brings another angle to what we’re adding.”
Mount Auburn, which opened its doors in 2008, was an early entrant to many of the markets that are being tipped for expansion in a post-pandemic world. The company has boots on the ground in Atlanta, Austin, Charlotte, Columbus, Dallas/Fort Worth, Denver, Houston, Indianapolis, Jacksonville, Louisville, Nashville, Orlando, Phoenix, Raleigh, Salt Lake City, San Antonio, Tampa and Washington, DC, and will use its local knowledge to source projects for the venture.
“The growth fundamentals for these markets have existed for well over a decade,” Pavlovich said. “We see the population growth, corporate relocations and migration patterns accelerating post-pandemic.”
Lussier declined to disclose the potential size of the venture but noted that Ivanhoé Cambridge sees the partnership as part of a long-term plan. The preferred equity investments will have a term of around 36 months, with partners anticipating that it will reinvest proceeds as loans are paid down.
Lussier stressed that Ivanhoé Cambridge is not a passive investor and that it speaks weekly with its partners. It also encourages communication between partners in the hopes that this will spur best practices across the portfolio, he said. Over the longer term, Ivanhoé Cambridge would consider expanding its work with partners as it grows its residential real estate portfolio.
“I see us having new partners in the US and globally that bring us a good alignment of interest,” Lussier said.