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How One Fund is Helping Japanese Institutions Invest in U.S. CRE

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Cross-border investment in the U.S. is much slower than the pre-epidemic rate, but yield-hungry foreign institutions are still roaming the market looking for buying opportunities. The demand from Asian buyers is causing Reven Capital to jump these days. The company is the new U.S. acquisition and operating partner of GI Capital Management Ltd Tokyo.

Reven Capital has set an ambitious target of acquiring about $ 2 billion in core assets by the end of 2022. The interesting story is the huge appetite from Asian pension funds, insurance companies and wealth funds seeking cash flow Cash, says Chad Carpenter, chairman and CEO of Reven Capital. “They’re looking for return games. Everything on the back end is a sauce, but the main investment criteria are really the average cash return over the holding period, ”he says.

Japanese institutions are examining real estate in the US similar to investing in fixed income bonds. They recognize that they can get higher returns on buying real estate with a credit tenant compared to corporate bonds, Carpenter adds. A carpenter is a veteran in the real estate industry with More than 25 years of experience in real estate investment and operation. He has sponsored four private real estate funds, and he also founded Reven Housing REIT in 2012, which he later sold in 2019. WMRE recently spoke with Carpenter about its strategy to acquire core real estate assets on behalf of its foreign clients.

This interview was conducted for style, length and clarity.

WMRE: Is $ 2 billion a solid target?

Chad Carpenter: We set a $ 2 billion target. We can invest more if we find suitable deals, and if we do not find enough deals, then we will not reach our goal and invest less. So, the crane can move up or down depending on our success, and that success will depend on the competition we face – how many other core owners and core funds are out there, and how much they push the ceiling rates. We can buy much more than that, the capital is available, but I have to provide a certain minimum return in cash after the debt service.

WMRE: From whom do you raise capital, and what is the structure?

Chad Carpenter: We have formed a partnership with GI Capital Management. They represent institutional investors in Asia seeking to allocate core capital to the U.S. Reven Capital is the U.S. Purchasing / Operating Partner. We are currently working on transaction after transaction and creating separate entities for each transaction.

WMRE: Can you expand your investment criteria? What types of properties are you looking to buy?

Chad Carpenter: Mostly we are looking at single or multi-tenant properties that have a minimum of 50 percent of the property leased to a credit tenant, BBB + and up, for 10+ years. Property types include industrial transactions, offices, medical or life sciences offices and student housing, all in Tier 1 or 2 markets.

WMRE: This seems to be a fairly broad goal.

Chad Carpenter: It really comes down to the section of the creditor. Most of the deals we sign are industrial and office. We have not seen many deals in the life sciences. While we see a lot of student housing, many of them include smaller deals. We work with various pension funds in Asia. Two want student housing, and another sovereign wealth fund wants both. So, we work with a few different investors when we get deals, and usually one of those investors will fund the whole deal.

WMRE: What size transactions are you targeting?

Chad Carpenter: Our ideal transaction size is to invest between $ 40 million and $ 80 million per transaction. So that would be $ 100 to $ 200 million on a leveraged basis, but we could also invest in bigger deals. The largest deal we have offered so far is about $ 230 million on the leaseback of an industrial credit tenant. We got to the good and final, but it turned out we were the lowest bidder. The deal ended up costing $ 270 million and the quota rate was really squeezed. It was a brand new property rented to a large tenant with a long term lease. It actually sold at a double replacement cost.

A lot of these investors are pushing the ceiling rates down because they can get lower debt costs today, or maybe they are resolving cash on lower cash in the core fund. But when you start paying double the replacement cost, because you managed to get a cheap debt, you risk going down the road. If this tenant does not renew and if you can not swap with another creditor, and if interest rates rise significantly at the back end of a 12 year lease governor, you may be wiped out on the equity side.

WMRE: Where do you see, or expect to see, the best buying opportunities?

Chad Carpenter: We have reviewed hundreds of transactions and offered only 15 transactions so far with a total value of over $ 2 billion. We did the good and final only in four deals and did not win any of the deals because other core buyers paid much higher prices. We see deals all over the U.S. in major cities and universities for student housing opportunities. We see very low quota rates for new tenant credit deals, which most core investors seem to prefer. Many of the opportunities we found and offered are all great – except for the low rates.

WMRE: What kind of return expectations are you looking for, or what are the return expectations for your investors?

Chad Carpenter: We aim for a leveraged average return of 8 percent in cash on capital after expenses, debt and reserves before cost of ownership. This can be achieved at a ceiling of 4.5 if we do not have to keep a lot of capital with low interest rates, but if the interest rate rises then the quota rates should go up.

WMRE: Obviously it’s a competitive market. How hard is it to deploy this capital?

Chad Carpenter: It’s the hardest I’ve ever seen in my career. I just read an article on The Wall Street Journal Because in the last quarter there were the most commercial real estate deals ever. So it’s super competitive and there’s a lot of money going to the core. The reason behind that is simple. The interest rate is low. You have billions, if not trillions, of dollars in fixed income investments that don’t make money. Increases allocations for alternative investments and real estate, which brings in more capital to look at real estate for return. The result is lower quota rates and higher sales volumes and more competition. When we work for opportunistic hotels or offices, there is much less competition because there are far fewer buyers for opportunists.

WMREQ2: What do you see for quota rates?

Chad Carpenter: Crazy lid rates. We hear about deals of less than 3% to the Los Angeles industry it just does not make sense. The money is currently in multi-family and industrial development because you can build for a higher roof rate and sell at a much lower roof rate.

WMRE: What do you think is going to be the secret to pushing capital out of this competitive market?

Chad Carpenter: One of the strategies we are currently deploying is that we seek to provide capital in development to industrial developers. We are willing to take the risk of development because there is such a gap in quota rates. We can not compete against these buyers with 4 caps and down. It does not work for the disciplined capital I work with.

WMRE: Overall, what you hear from your foreign investor clients. Has the epidemic changed their perception of the US real estate market?

Chad Carpenter: We hear that there is a strong demand for core real estate in the US because there are fewer opportunities in Asia, and of course there is also political risk in many markets. The US is seen as the safest place to invest compared to other markets. Although there is less political risk in Japan and South Korea, these are smaller markets. So it’s really hard to find deals. They too love Europe, but they face the same problem with low quota rates.

The plague has not changed their perception from the point of view of real estate allocation. They are very bullish towards the US, but also very disciplined. Their opinions are not to pursue low rates but to invest as much as we can in deals that meet our investment criteria and return criteria.

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