Foreign Exchange Players: Intervest Capital Partners Describes Foreign Fundraising

Gontar and Rothschild sat down with Commercial Observer to discuss their firm and its CRE investment strategy. 

This interview has been edited for length and clarify

Commercial Observer: What are your real estate investment strategies today? 

Rob Rothschild: We have two main strategies: our credit business and our equity business. Historically we’ve been more active in equity business dating back to 2010 and 2011, coming out of the Global Financial Crisis, primarily buying cash-flowing multifamily properties, together with operating partners we’ve formed long-term relationships with. As far as our capital base, going back to the late 1990s, early 2000s, our investors are very focused on cash flow. Whether that’s in equipment-leasing businesses or various types of specialty financing, cash flow is king for us. 

So when we were buying multifamily properties between 2011 and 2016, we were buying them at 6 or 6.5 [cap rates], putting cheap agency financing on them, and were able to deliver high single-digit, to double-digit cash-on-cash yields throughout that period, and that was very attractive to our investors. Obviously, the environment today is quite a bit different than it was back then. Cap rates are tighter, interest rates are higher, and you don’t have implicit spread to deliver that higher, levered yield. We shifted our business three years ago to further build out our credit business. More recently, we’ve been doing direct transactions in the credit space, and forming joint ventures with groups like Smith Hill Capital and ECI Group and a group in Miami called Pensome Capital. We’re very bullish on U.S. multifamily, even though there’s been a lot of headwinds. We feel multifamily, of all asset classes, is poised for stable, steady growth, and we’re not looking for 10 percent to 15 percent rent growth every year. If we can get 2 percent to 3 percent rent growth each year, then we’re very happy with someone like that on the credit side. 

Michael Gontar: I’d add that real estate is a meaningful portion of our strategy, but we manage just over $10 billion in assets today, and own or partner with 23 different credit-focused businesses throughout the U.S. We have over 3,500 people in those businesses. It’s especially non-bank speciality financing, so everything from venture debt, health care lenders, home improvement finance, just a variety of specialty finance lender platforms. 

How does lending in other realms inform your real estate lending?

Gontar: From an investment strategy perspective, we see synergy between our businesses, in particular in how we capitalize our transactions. You have senior lenders, whether they be insurance companies or the larger banks that are providing accretive financing to us at platform level, or for direct transactions, potentially senior to us. It also gives us the opportunity to partner on transactions. Many senior lenders, whether they be banks or insurance companies, are often looking for either participants in debt deals or are looking for operators who can step in if a transaction went upside down, which is obviously a space where we can play as we’re straddling both the equity and the debt side. 

Rothschild: We pride  ourselves on being relationship driven. While we have certain markets we prefer, with New York being one of them, given that we’re located here, we’ll follow our sponsors and partners to certain areas. 

On the multifamily side, the focus isn’t just multifamily, but it’s very residential focused, whether that’s condo construction, or traditional multifamily, or land banking, or construction lending for townhomes, plot developments, all types of housing throughout the U.S. It’s an area we’re bullish on and are continuing to put out capital in.

As a true private sector player, how do you view the nation’s housing crisis?

Rothschild: Each market is a little bit different. It’s done on a jurisdiction-by-jurisdiction basis as opposed to national scale, for the most part. New York has taken good steps of revitalizing  421a with 467m and 485x [tax incentives], and the office-to-residential conversion is picking up lots of steam, so New York City is the market we’re most familiar with, and I think we’re making decent progress. There’s still quite a ways to go, but when you talk about the nation as a whole, the housing stock is very old. We feel that new development is what people want to buy and live in these days, and that’s why we’re very focused on that space. 

Gontar: Let me add, we play in two different segments that relate to this: one is ground-up financing for single-family housing, what would typically be considered starter homes, and that business is growing quite a bit for us. The other segment is multifamily housing. We ourselves are both a capital source and a sponsor playing in the office-to-residential conversion space, if you will, ground-up rental projects in New York that have an affordable component, depending on whether that’s 421a or the 467m, so we’re seeing it from different segments of the market and participating all across the way. We’ve raised over $3.5 billion in fresh capital this year alone, between new capital and commitments through year-end commitments, quite a bit of which is targeted for real estate-focused debt. 

What’s your relationship like today with Kuwait?

Gontar: So the tie to the Middle East, or Kuwait specially, is our former sister company, Wafra, our former parent, an equivalent of the Social Security system in the U.S. — that’s who we used to be owned by. However, our capital is from all over the Middle East, primarily from the GCC [Gulf Coast Countries]. North of 50 percent is from Kuwait, but we’re essentially sourcing capital from the entire GCC region, not just Kuwait, though we are today 100 percent employee owned. 

How does that differ from sourcing capital out of the U.S.?

Gontar: We have never focused on sourcing capital out of the U.S. The primary reason is we built a business initially out of structuring investments for investors looking for tax-efficient sharia-compliant investment strategies. And that market is obviously much larger outside of the U.S. and continental Europe. From a U.S. perspective, the type of investors who are interested in our strategies are on a bilateral basis, where they are either participating in some of our deals, lending to our businesses, or considering investing with us in a SMA-type structure. 

What do you mean by “sharia compliant”? 

Gontar: Essentially, it’s structuring transactions and screening them for what is known as sharia compliance. We have a sharia board for those funds or investors that have to approve certain aspects of transactions. The impact on the investment side is that there are certain types of transactions or asset classes you can’t lend in or advertise in. For example, you can’t build a pork producer, you can’t be invested in alcohol sales or production, or be involved in tobacco or firearms. Think of it as almost ‘sin funds,’ you’ve heard of that. Well, this is the anti-sin funds. Not all our funds are sharia compliant, but we have quite the history in structuring our investments to be in line with sharia-complaint principles. 

How has your firm responded to the dislocation of office investment over the last four years?

Rothschild: I’d start by saying the office investments haven’t been a big part of our investment strategy to date, though they are some of the more public ones, but not from an assets-under-management perspective. Our largest transactions are multifamily, it’s probably four to five times larger than our office portfolio.

Listen, the office market has been challenged. We’ve been very successful in ways to asset-manage through our existing office portfolio, restructuring debt with our lenders, buying debt back at discounts to reduce the basis, and as we sit here today, we have six office buildings and we have long-term plans for each one of them. Going forward, there is a place for office in the asset allocation for managers such as ourselves, but it will be a smaller percentage of the pie, and transit-oriented office locations will drive the day. Think about New York City. Office buildings close to Grand Central Station or Penn Station are opportunities we are interested in looking at.  

But the basis is more difficult to underwrite, so you must have a long-term view when buying office today and understand that every five to seven to 10 years you need to reinvest into asset for tenant-improvement dollars, leasing commission dollars, and that doesn’t even include the dollars you need to invest to keep the asset as a sustainable and desirable building. We’re not shutting the door on office by any means, but we’ll continue to be selective in the type of opportunities we’re looking at. 

What are you worried about in the market today?

Rothchild: Most people in real estate get excited when you have interest rate cuts. We have had 75 basis points cut recently, and I’m a tad bit nervous it was too much, too soon, and the inflation numbers may not cooperate. Only time will tell what ultimately happens with that. I think something more measured by the Fed, like lowering 25 basis points a few weeks ago and another 25 in December, would have given us a smoother transition into a long-term and stable interest rate environment. You’ve seen the 10-Year Treasury has fluctuated quite a bit as a result of that, and the agencies have widened spreads a bit, as well. So we haven’t necessarily found our footing yet on where the market is shaking out, with transaction volume significantly down from 2021 and 2022 levels.  

And what are optimistic about?

Gontar: There’s quite a bit to be encouraged about. Overall, as we look at our portfolio, especially in terms of the last couple of years of origination, the credit quality we’ve seen in our portfolio is very good, even better than we anticipated. We have relatively few defaults, and on the equity side of our business, our operating income targets are hitting the mark. We’re seeing rental growth in most markets we’re in. We are feeling pretty good across our equity and debt business today. On the office side, there’s no doubt there’s been tremendous correction in the office world, but it’s not just COVID, there were some markets that were oversupplied to begin with. For us, as a well-capitalized sponsor on the equity side, we’re able to reduce our debt load and work things out with our lenders so our basis is lower. 

There’s a new $250 million joint venture fund your firm closed. How does something like that come together with several firms? 

Rothschild: The Smith Hill joint venture together with ECI is something we’re really excited about. The combination of the three groups is something of a perfect storm. ECI has a long history of owning and operating multifamily properties and can underwrite like an owner would. The Smith Hill team has a very strong credit background in terms of underwriting and structuring transactions, and we’ve been on both sides of the table in terms of doing all of the above. It was a way for the three of us to come together. We all sat down and said, “We see the world the same way, and we think about transactions the same way.” I think one of the key pieces is if a transaction goes wrong, we have the asset management capital via the ECI platform to step in and right the ship. Not every group has that. The way we’ll win deals is by timing and execution and maybe pushing leverage higher than others would because we feel comfortable with the assets and understand these markets intimately. 

Brian Pascus can be reached at bpascus@commercialobserver.com