The strategy of the multifamily fund focused on Latin American communities
Gerardo Mahuad believes that investors can buy apartment buildings in various neighborhoods, improve the buildings, increase rents while having a positive impact on these communities.
He is co-founder and managing director of Eagle Property Capital (EPC), a minority-owned private equity fund based in Coral Gables, Florida.
The company has 11 years of experience delivering above-target returns to investors, with approximately 6,500 apartments currently in its portfolios, primarily in Florida and Texas. Since 2011, the fund manager has acquired, repositioned and managed nearly 9,000 apartments across 36 properties and now has approximately $950 million under management. All of these properties are in submarkets where at least 20% of residents are Latino, and all EIC staff are Hispanic or have experience serving the Latino community.
EPC recently announced the initial closing of its Fund V, a $400 million value-added multi-family fund launched last year with its new joint venture partner, Mexico-based Promecap, one of the leading private equity firms. investment in Latin America.
EPC also provides a rich range of services to residents of its apartment communities, helping them to increase their income as rents rise.
“It’s a balance. We are looking for certain risk-adjusted returns with a [positive] impact,” says Mahuad. “Properties must show a clear opportunity to add value, both the property and the residents.”
WMRE sat down with Mahuad to ask how EPC achieves this balance.
This interview has been edited for style, length and clarity.
WMRE: What is the added value provided by your fund?
Gerard Mahuad: We invest in culturally diverse neighborhoods with an “impact” strategy. As value-added players, our strategy includes a significant amount of capital improvements. But we also add value for our residents through special programs.
We invest in properties with high potential…. Our goal is to acquire properties with a rent to income ratio well below 33% of household income. For example, in Texas, the threshold is in the low to mid-20s. In Florida, the high 20s…in some cases, 30%.
We try to stay away from flat roofs and properties dating back to 1970 – we look for a solid structure and good general condition. Our medium-sized properties are approximately 300 units, garden-style, in infill locations with strong fundamentals – with economic, employment and population growth, barriers to entry and proximity to business centers. employment and education…and median incomes over $40,000 within a one-mile radius.
We believe that the diversity of our team adds tremendous value. We have marketing materials in English and Spanish. We reach the target community in nearby retail stores, restaurants and schools, for example. Minorities are sometimes underserved and neglected. We make sure they feel welcome and at home in our communities.
We try to have an impact on the lives of our residents. We are also seeing their income increase. We add value for them, for example, through programs that report payments to major credit bureaus that help improve their credit scores, which will also impact their income.
We also have rent relief programs so that single parents have time to work in the afternoons. We have English as a Second Language and Spanish courses that will advance their professional careers. We have personal finance classes and health and wellness education and economic advancement education.
This is how we believe the rent to income ratio will continue to be within safe margins.
WMRE: Have you participated in any Fannie Mac or Freddie Mac programs to fund workforce housing?
Gerard Mahuad: The majority of our loans are with Fannie Mae and Freddie Mac…we have been very close and factor that into every transaction. We hope to have one very soon.
WMRE: What type of return are you likely to offer your investors?
Gerard Mahuad: Our Fund V, we will seek to provide average cash distributions of 6% upon stabilization and generate an overall net IRR of 12%-15%, net of expenses, management fees and promotion over the term of seven years of the fund.
For Fund V acquisitions, we are very conservative in the assumptions we make. If we acquire properties at a low 4%, we assume that in five years we will resell them at a cap rate closer to 5%.
Historically, in our completed investment vehicles, we have met and exceeded our returns. TRIs varied between the mid to high 20s, with average multiples of about twice. We achieved these returns with a conservative approach to debt, averaging 65% loan-to-cost ratio. What we gain is a very attractive risk-adjusted return and the ability to sleep at night.
WMRE: Who are your capital investors?
Gerard Mahuad: We have very loyal family offices that have been with us since our first fund. We have achieved a 75% reinvestment rate from fund to fund. Our marketing comes primarily from referrals from current investors.
Interest from institutional investors certainly increases as you establish a track record of success. We also expect our partnership with Promecap to bring in more institutional capital.
WMRE: Do you put your equity in your funds?
Gerard Mahuad: Of course, we believe so much in what we do…the managers’ co-investment is at least 5% of the capital employed.
WMRE: Has the coronavirus pandemic revealed anything about your communities?
Gerard Mahuad: We have seen how resilient our properties and residents have been and our team has been. Everyone really rose to the challenge and really brought their best. It was very inspiring for me.
The lowest collection level in 2020 was 96.6%. It’s really, really strong and close to the 98% average that we have. People paid because we were able to work with our residents on payment plans.
WMRE: Do you think the cultural sensitivity, connections between residents and language skills provided by your property teams made the difference?
Gerard Mahuad: Everything counts. Everything we talked about for sure is part of what drove revenue and retention and part of our strategy or “secret sauce”.