Gerardo Mahuad believes that investors can buy apartment buildings in diverse neighborhoods, improve buildings, raise rents and still make a positive impact on those communities.
He is the co-founder and managing head of Eagle Property Capital (EPC), a minority-owned private equity fund based in Coral Gables, Fla.
The firm has an 11-year track record of delivering above target returns to investors; it currently has approximately 6,500 apartments in its portfolio, primarily in Florida and Texas. Since 2011, the fund manager has acquired, rehabilitated and managed approximately 9,000 apartments on 36 properties and now has approximately $950 million under management. All of these properties are in submarkets where at least 20 percent of residents are Latino, and all EIC employees are either Hispanic or have experience serving the Latino community.
EPC recently announced the initial closing of its Fund V, which last year with its new joint venture partner, Promecap, Mexico-based, one of Latin America’s leading private equity firms, is a $400 million, value-added, multi-family Fund was launched.
EPC also provides a rich suite of services to residents in its apartment communities, helping them to increase their income as rents increase.
“It’s a balance. We’re seeking some risk-adjusted return. [positive] effect,” says Mahuad. “Both properties and residents need to show a clear opportunity to add value.”
WMRE Caught up with Mahoud to ask how the EPC strikes that balance.
This interview has been edited for style, length and clarity.
WMREWhat added value does your fund provide?
Gerardo 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 to our residents through special programs.
We invest in properties with upside potential…. We aim to achieve properties where the rent-to-income ratio is much less than 33 per cent of household income. For example, in Texas, the threshold is in the low to mid-20s. In Florida, the high 20… in some cases 30 percent.
We try to stay away from old flat roofs and properties from the 1970s – we look for sound structure and overall good condition. Our average properties are around 300 units, garden style, in infill locations with strong fundamentals – economic, employment and population growth, barriers to entry and proximity to employment and education centers… and within a mile radius of $ Average income above 40,000.
We believe that a great deal of value adds to the diversity of our team. We have marketing materials in both English and Spanish. For example, we reach the target community in neighboring retail stores, restaurants and schools. Minorities are sometimes neglected and neglected. We make sure they feel welcome and at home in our communities.
We are trying to make an impact on the lives of our residents. We are also seeing an increase in their income. We add value to them, for example, through programs that report payments to the major credit bureaus that help raise their credit scores—which will also have an impact on their income.
We also have rent relief programs so that single parents have time to work in the afternoon. We have English and Spanish as a Second Language classes which will further their professional career. We have personal finance classes and health and wellness education and economic advancement education.
Thus, we believe that rental income will remain in the safe margin.
WMRE: Have you participated in Fannie Mac or Freddie Mac programs to finance workforce housing?
Gerardo Mahuad: Most of our loans are with Fannie Mae and Freddie Mac… We have been very close and we value this in every transaction. We hope we will have one very soon.
WMREWhat type of return are you likely to deliver to your investors?
Gerardo Mahuad: Our Fund V We aim to provide 6 per cent average cash on cash distribution on stabilization and generate an overall net IRR of 12 per cent to 15 per cent, net of expenses, management charges and boost over a period of seven years.
As for the acquisitions in Fund V, we are very conservative in our assumptions. If we acquire properties at at least 4 per cent, we assume that in five years we will sell it at a cap rate close to 5 per cent.
Historically, in our real investment vehicles, we have met and exceeded our returns. The IRR ranges from mid to high 20s with average multiples of almost two times. We have achieved these returns with a conservative lending approach, with an average debt-to-cost of 65 per cent. What we are achieving is a very attractive risk-adjusted return and the ability to sleep through the night.
WMREWho are your equity investors?
Gerardo Mahuad: We have very loyal family offices that have supported us since our first fund. We have achieved a reinvestment rate of 75 per cent from fund to fund. Our marketing has mostly come from referrals from existing investors.
As you establish a successful track record, the interest of institutional investors is sure to rise. We also expect our partnership with Promecap to bring in more institutional capital.
WMRE: Do you put your own equity in your fund?
Gerardo Mahuad: Certainly — we believe so much in what we’re doing… The co-investment of managers is a minimum of 5 percent of committed capital.
WMREQ: Did the coronavirus pandemic say anything about your communities?
Gerardo Mahuad: We saw how resilient our property and our residents have been and our team has been. Everyone has really risen to the challenge and really brought out their best. It was very inspirational for me.
The lowest level of collection in 2020 was 96.6 percent. It’s really, really strong and we have close to the 98 percent average. People paid because we were able to work with our residents on payment plans.
WMREQ: Do you believe that cultural sensibility, the relationship between residents and the language skills provided by your property teams made a difference?
Gerardo Mahuad: everything counts. Everything we’ve talked about is definitely part of receipts and retention and part of our strategy or our ‘secret sauce’.
