Walker & Dunlop Investment Partners sees room to expand its separately managed accounts, with the investment management company recently forming a programmatic joint venture with Ivanhoé Cambridge to originate preferred equity and mezzanine debt investments in the middle market deals across the US.
The Denver-based subsidiary of Walker & Dunlop has signed up two other institutional investors for separately management accounts during the summer, originating small balance bridge loans on behalf of a life insurance company and multifamily lending with a consortium of Korean banks, Sam Isaacson, president of Walker & Dunlop Investment Partners, told Real Estate Capital USA.
“We continue to be very active and look to expand our buckets of capital,” Isaacson said. “But we also continue to be very cautious. This market continues to be red-hot in terms of momentum, in terms of rent growth, and it feels uncomfortable to be investing on the equity side right now without true value creation and a good story on buy. However, we continue to be interested in defensive strategies, like mezzanine debt and preferred equity, and continue to be careful on our exposure to the last dollar of risk.”
Ivanhoé Cambridge partnership
Through its partnership with Ivanhoé Cambridge, WDIP will be focused on sourcing and executing preferred equity investments in multifamily, student housing and manufactured housing opportunities across the US. It will mainly focus on stabilized assets in the 25 largest MSAs and has set a three- to 10-year investment horizon, with the idea of providing a flexible source of gap financing for borrowers, Isaacson said.
The partners are seeking opportunities of $5 million to $25 million, or about 75 percent of the cost of a project. In certain cases, the partners could go into the 80 percent range, Isaacson said. The venture is seeking high single-digit returns by originating preferred equity, mezzanine loans or n-notes. The partners will originate loans targeted towards acquisitions and refinancings, with an emphasis on the former. “When a refinancing involves a meaningful takeout, it can be challenging,” he added.
“Where we play in the capital stack will be situational, depending in part on the senior lender. Our preference is to have preferred equity – the agencies will only allow preferred equity behind their senior loans. There are also a number of lenders who will only allow B-note structures,” Isaacson said.
This mandate is geared toward the housing market, given the broad demand for housing that exists. “This also aligns with our pipeline as well as Ivanhoe Cambridge’s research and forecasts about the kind of sectors that they want to be in,” Isaacson said. “Manufactured housing took them a little time to be comfortable with, but then they started to understand how it performed during the global financial crisis and how it fit into the affordable housing picture.” There is also limited capacity for student housing investment, he added.
Partnerships like this take time to set up, with Isaacson noting that WDIP and Ivanhoé Cambridge had been in talks for almost two years about the parameters around investing. Initially, the partners had discussed originating preferred equity on agency-originated debt prior to the covid-19 pandemic when cap rates were very low and agency leverage was very constrained, he explained.
But after the pandemic hit, the dynamics of the market changed. Many non-agency lenders pulled back and other lenders were not willing to take the risks associated with higher leverage. “Things went sideways for a while and then, in the middle of the pandemic, the agencies starting funding at higher levels,” Isaacson said. “Now the agencies are becoming a little more constrained in how high they can fund and we’ve been talking about ways to expand the program.”