Institutional Standards, Entrepreneurial Execution RLEE@SilverPortalCapital.com 310-692-4480 www.silverportalcapital.com www.silverportaldirect.com Topic: Raising Institutional Capital for Private Real Estate Speaker: Robert E. Lee, MBA, CCIM
Company Overview Silver Portal s business platform provides a full complement of strategic/financial advisory and capital raising services for public REITs/REOCs, non-traded REITS, and private companies in the real estate industry. We focus on both traditional and non-traditional (core and non-core) property types, in situations that provide the potential for dynamic growth and superior risk-adjusted returns. The firm s highly experienced partners have advised on and raised capital of more than $17 billion for the real estate industry in over 140 transactions, and have completed over 275 investment banking transactions in total. Investment Banking Advisory Services Strategic recommendations Recapitalizations/Restructurings Valuations/Fairness Opinions IPO Listing Advice Private Equity raised from long-standing institutional and high-net-worth relationships for multi-year, multiasset partnerships or entity-level investments, from $50-$250 million, as well as significant individual projects which require equity of more than $10 million. Merchant Banking Transaction Negotiations Merger and Acquisition Advisory Portfolio sales Sector-Focused Growth Capital is obtained from large institutional and high-net-worth investors for companies in sectors with strong demographic fundamentals and clear growth trends, in which Silver Portal may participate as a principal. Our Principals are industry veterans who have formed and led the real estate investment banking, merchant banking, and high-net-worth investor departments of multiple Wall Street firms. They form a powerful team with an unmatched combination of real estate transaction experience, industry knowledge and investor relationships. 2
Investor Types and Investment Considerations Silver Portal creates competitive tension to enhance value and optimize Joint Venture terms for sponsors Traditional Sources Owner / developer personal resources Friends & family HNW investors Institutional Sources Multi-family family offices Co-mingled dedicated real estate equity funds Pension funds (public and corporate) Endowments Foundations Life insurance companies Sovereign wealth funds Listed and unlisted REITs Hedge funds Taft Hartley funds (unions) 3
Investment Criteria Real estate private equity investors will consider the following investment criteria: History In-house capabilities Risk/return relationship Structure Strategy (e.g., acquisitions, development, capital allocation between asset types) Partner/Advisor (e.g., history, financial strength, reputation) Property type Geography Hold Period One size does not fit all Certain investors are constrained by very specific investment mandates Investor s role of real estate will determine strategy (cash flow/current income vs. return) 4
Investment Return Characteristics Core Class A assets or premier multi-tenant buildings Primary markets High occupancy/credit tenants/long-term leases Stable cash flow investment Modest leverage <50% when used Return targets ~ 8.0% - 9.0% Core - Plus Variation on core investing Primary markets Fewer credit tenants Some vacancy or re-leasing risk Cash flow with some potential for growth through increased cash flow Slightly higher leverage 50-60% Return targets ~ 10.0% - 13.0% Value -Add Class A and B assets Recovering primary markets or secondary / tertiary markets Mid-high vacancy / re-leasing risk / obsolescence / rents below market / repositioning Balanced mix of cash flow and appreciation Moderate leverage 60-70% Return targets ~ 14.0% - 17.0% Opportunistic Class A and B assets Recovering primary markets or secondary / tertiary markets Mid-high vacancy / re-leasing risk / obsolescence / rents below market / repositioning Balanced mix of cash flow and appreciation Moderate leverage 60-70% Return targets ~ 18.0%+ 5
Investment Structure Single Asset Joint Ventures Strategic / Programmatic Joint Ventures Entity / GP Investment Co-mingled Funds Joint ventures are individually negotiated and tailored transactions A joint venture may be formed to: Acquire a specific property or a portfolio of properties Recapitalize an existing partnership Develop or redevelop a property Vehicle for sponsors who have a good reputation and track record Establishes terms on which a series of investments may be made with a single investor or a small number of investors Terms vary widely and are individually tailored (discretion within a box vs. deal by deal approval) Can offer a more certain funding source for projects within specific parameters Sponsor can contribute existing assets and/or close around pipeline assets Investments by one or more investors at the operation company (entity) or sponsor equity (GP) level Involves sale of a portion of all income streams generated by the entity or the GP Investments can take form of common or preferred equity and can vary with respect to governance Can provide permanent capital and a long term / global solution for the sponsor Creates alignment of interest; typically aids in raising additional JV capital Group of investors pool their resources to create a larger investment Money is gathered from various sources that are managed together in one account Includes a wide variety of entities including insurance companies, group trusts, limited partnerships, LLCs and private or untraded REITs 6
Structuring Joint Ventures Involves formation of a new, special-purpose entity to own the properties of the joint venture Development joint venture Acquisition joint venture Disposition joint venture (e.g., sponsor contributes assets at agreed upon value while institutional investor contributes cash) Single asset or programmatic joint venture Ability to attract programmatic capital largely determined by investor appetite, sponsor track record, investment parameters and visibility of pipeline Each joint venture is idiosyncratic; there are no pre-set terms and conditions Profit sharing based on value of equity, skill set, and operating team contributed by the parties to the joint venture Terms to be negotiated include: Co-investment (e.g., 90%/10%; 95%/5%) Preferred returns, total returns, clawbacks Promotes Governance Guarantees (Development: completion; payment; environmental; non-recourse carveouts) Hold period Exit Buy/Sell (may include buy/sell provisions where properties are liquidated through acquisition by one JV partner or sale to a third party) Transaction costs, fees and expenses 7
Key Terms Term Waterfall Structure Comments Portfolio returns crossed vs. project or deal-by-deal returns. Preferred Returns Calculated from the day capital is contributed to the point of distribution. Development: 9-10%. Promote Target Returns Investment Period Exit Period Clawback Provision GP Commitments Fees Leverage Maximum Governance / Discretion Waterfall distributions: Preferred return pari-passu; return of capital; remaining proceeds split TBD based on return requirements (consider two separate waterfalls strategy determined) of Investor. Leveraged returns a function of acquisition / development strategy (TBD strategy determined). Generally now being scaled back to 1-3 years, 2-3 years for deep value-added and development. Evidence suggests shorter JV durations, now 5 years on average (based on real estate strategy). The period may extend beyond the term of the venture, including liquidation and any provision for LP giveback of distributions (clawback typically to preferred return plus). LPs expect aggregate GP commitments to be meaningful. Contributed through cash and not through a waiving of fees (95/5 or 90/10 is market). As Managing Member, provide services to the JV and entitled to receive market fees (e.g. property management, leasing, development management, acquisition). Averages in the 60-70% range. Will manage the day-to-day affairs of the JV subject to decision-making authority guidelines to be set forth in a JV Operating Agreement and an approved annual business plan. The Investor will have the right to control all major decisions that would affect the property (e.g., contributions/distributions of cash flow, capital transactions, major capital programs, inter-company payments or contractual relationships, etc.). 8