Examples of “REPE” deals

Might be a dumb question. But can someone please help point me to examples of deals that have helped the closed-end fund shops deliver their target returns? I ask this as someone who works at a large ODCE fund and in my career we've nearly exclusively invested in development with top sponsors, and the only competitor I know of on the "PE" side is Carlyle. Basically all of my investment training I've been taught why bother fixing up X POS asset when I can build a new one for less. Really curious as I see my next career move to somewhere I can make Partner / get carry. But kind of no idea how to find or underwrite grittier REPE acquisitions that deliver high returns. Thinking deals min $4B NAV AUM type of firms would target. Thanks. Also excluding any type of BX LBO stuff, as I'll probably never do that in my career.

Comments (5)

  • Associate 1 in IB-M&A

Funding a development deal with a top sponsor is a REPE deal.

Grittier is not always better. A lot of the time that whacky hotel renovation deal still only hits a 20% IRR. You could've just done a solid multi family development deal and got the same returns.

REPE Deals I've seen recently that fit your description:

  • Converting 80s vintage office to multi family
  • Converting 80s vintage office to lab space
  • Heavy renovation of a ski-in/ski-out hotel at a major resort
  • Light renovation of a CBD conference hotel

These deals just came through the standard major brokers

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  • Principal in RE - Comm

There are quite a few REPEs that JV development deals or buy from a merchant builder and take it through lease up. So the fact that you're working with a developer means that you are working on REPE deals. 

What I think you're referring to, and correct me if I'm wrong, are pre-existing assets that go through a value add program? I won't give away our deal specifically otherwise it would be easy to figure out where I work, but we had a deal in FL that was in a great location and built in late 1980's that needed units nearly full renovated and an update/add to the amenities. We bought it for below replacement price (even with the $/unit reno cost) and after the refi got most if not all of our money out. From there it cash flowed for about 6-7 years before we exited the position and took home an IRR of about 26%. This deal was definitely institutional size as it was 300+ units and it sold to another institutional group that was looking for Core+ deal profiles. While this was several years ago, I think this is what you were looking for in terms of an example. Basically finding deals that are below replacement cost (otherwise why not just develop right?) and bring them up to market standards to get top of the market or close-to rents. 

Ozymandia, what's your opinion? Comment below:

"Gritty" does not mean better, or higher returning.  The opposite is true, generally, in that deals with few hurdles or obstacles to get them built tend to be attractive to many, and thus yields get driven down in a bidding process.

That being said, "REPE" is just allocating equity.  Any deal in which a Sponsor reaches out to third party capital to fund some of their equity requirement is a "REPE" deal.  Generally speaking, driving those returns comes down to the quality of the Sponsor and the business plan they're executing.  Buying Class B/C multifamily in Austin TX and expecting to generate 20%+ returns just by putting in new countertops and appliances is stupid; that concept is played out, though you could argue it is easier to convince a credit committee of the validity of the plan just because it's "safe" and there is a CYA aspect to doing what everyone else has already done.

You drive higher returns by either having a skill or knowledge no one else does (or, if you're on the LP side, finding Sponsors who do).  Maybe you know your geography like the back of your hand.  Maybe you have in-house carpentry that keeps down construction costs.  Maybe you are very hooked in politically and can drive through rezonings or tax abatements.  Or, at its most basic, maybe you have cheaper capital than your competitors.

It's either that, or bet that the market keeps rising and bails you out.

  • Principal in RE - Comm

This is great. Only thing I would add that is more REPE than other costs of capital are large value add or conversion projects. Real popular in NY right now - office to multi conversion. Because office values are low, maybe you can buy office in an area, price in the capex to convert and stabilize a nice product, maybe B+ for an all in basis of 500k / unit when similar product in the area trades for 700k

VolatilitySmile, what's your opinion? Comment below:

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