I've had a couple of people PM me about what I do in REIT acquisitions and what the deal process looks like. I figured I'd post this for people's future reference. I work at a fairly large REIT (>$10billion AUM) so this process may be different for smaller shops. We also exclusively focus on CRE:
This is how the process usually works (very simplified):
1) A Managing Director receives an OM from a broker. The MD will usually do the first glance through the OM and will make a judgement call whether to do a further analysis or not. Almost 95% of the time they will know by looking at the OM for 10min and talking with the broker whether the deal is viable or not. Assuming the deal is viable then...
2) MD gives me the OM, the lease (which is usually included with the OM), and the broker's Argus model. It is then up to me to comb through the OM, lease, and any other documents provided. I'll spend an 30-60min going through these materials. With the items I learned from the OM/lease, I'll update the broker's Argus model. The broker's Argus is always much rosier than it should be. As I'm updating the Argus, I'll talk to our debt guy to get a quote on debt and then input the debt assumptions into Argus. Also during this time, I'll reach out to the broker if I have any questions about their assumptions or to learn more about the real estate or market.
3) After updating the Argus, I'll dump the cash flow into our firm's cash flow model. From here I'll figure out the IRR, cap rate, accretion/dilution, etc. I'll also run some sensitivity analyses.
4) Next I'll research the top tenants to figure out their businesses and read through their financials (assuming they are a public company).
5) With a thorough knowledge of the real estate, lease, model, tenants, and market, I'll then go back to the MD and present my findings. I will make a recommendation whether or not I think we should proceed. The MD will usually either kill the deal or say we should proceed. At most places, only 1 out of 5 (or more) deals goes to the next step. If it does, the MD may have me tighten up the model, change assumptions, etc.
6) MD submits a Letter of Intent (LOI) to the broker. Usually there are two rounds of bidding: the initial call for offers and the best and final. With all the offers in hand, the seller will select 2-3 to the best and final (these are not always the highest bidder).
7) Once you've made it to this point, the MD will have a good idea of what is our max bid and what bid would get us the deal. Brokers will be pretty honest with you if you have a good relationship with them. After you up your bid, you submit the best and final offer. Assuming you win, the not as exciting part starts....
8) Most deals have a 30-45 day due diligence window and a 10 day closing window. During those 30 days you will be getting the purchase and sale agreement (PSA) figured out, appraisals sent off, property condition reports (if not done during the bidding), zoning, etc. etc. Every firm will have their list of items. At larger firms a special due diligence team will handle this and the acquisitions people will be on the sideline for support. At smaller shops, this will be entirely up to you and your deal team.
During stages 1-7, you will have investment committee meetings/presentations and endless conversations with your deal team, broker, lawyer, etc. Your job is to crunch the numbers and understand the details of the deal so the MD can make a more informed decision. Usually I'll be working on 3+ deals at a time and each deal will be at a different stage.
Long-term career prospects in the REIT world is great, especially in acquisitions. My firm doesn't target MBAs, but if there is an associate position open, they will definitely accept MBA applications. Does that make sense? But we'd only take an MBA student IF they had some type of RE experience before (brokerage, lending, etc.). RE is not like most other realms of finance where an MBA is required. I think most places (including some of the tope REPE shops) would rather take someone with a bachelors + 5yrs RE experience over someone with an MBA and 2yrs RE experience. In this industry, experience/connections/reputation trumps degrees.
I got into REIT acquisitions after working in Big 4 audit. My route was not very traditional, but PM me if you would like to know more.
Great post! I'm sure a lot of people will find that helpful.
Thought I would add my two cents from a slightly different perspective within acquisitions. Quick background, I'm an analyst in acquisitions for a developer/operator (>$20B AUM).
Basically everything is the same as you mentioned above, except during steps 1-7 the MD or SMD is usually reaching out to internal fund/portfolio managers to see if the deal fits in their bucket, and if not then to other potential capital partners including true REPE shops, life insurance companies (and their core funds), asset management firms (BlackRock, Invesco, etc), or sovereign wealth funds (we usually put up 5-20% of the equity in a deal assuming it isn't allocated to an internal fund).
Regarding step 8, our deal team does all of the due diligence with the help of outside legal counsel for reviewing the PSA (Purchase and Sale Agreement) and any other documents that have a lot of legalese (could never be a lawyer, that stuff is so dry). We also usually have to draft up a JV contract/document to formalize our partnership with our selected capital partner. If it's a development deal, then there are MANY more steps beyond step 8 mentioned above as you have to entitle the land, conduct additional testing/reviews, work with architects/GCs, get drawings finalized, plans submitted, permits pulled, build the building (and deal with related issues including budgeting), price, market and lease the building, manage it, and then eventually sell the thing.
Lastly, as an analyst I usually make minor tweaks to the underwriting but get most of the guidance from the associate on the deal first, and then we take it to the MD/SMD to refine further, before sending it off to capital partners and or submitting an LOI/first round bid. We tend to underwrite everything as you'll never know which capital partner may or may not be interested in a deal, so we look at tons of deals but the closing rate is low since we're not just a fund looking selectively at deals.
As for hours, generally 8-9am to 6pm with some days a little shorter and few much longer every now and then if IC memos or other important docs/deadlines are nearing (10-11pm). Overall usually 45-50 hour weeks, which isn't too bad in my opinion given the compensation.
Great overview of the process. I work in a smaller shop and it is pretty much the same. We focus more on development/redevelopment than stabilized properties, so there's minor differences. In addition, our role is a little more expanded. I go through OM's and pass them along to our VPs if I think it's worthwhile, I have contact with the brokers, put together LOIs, etc. Sometimes we also identify properties we want and I'll track down the owner to make them an offer. I also have contact with tenants and help negotiate terms and coordinate drafting of the leases.
We invest nationwide, so there's a bit of travel involved. If the property is close (~5 hours), then I'll drive out with the VP and maybe SVP/President to look at it, otherwise we'll fly out to see it. Our owner provides all the equity, so I haven't had a chance to see equity raises yet. Overall, it's a good mix of computer work (Argus, LOIs, leases, market research, OMs, misc tasks for projects) and getting out and seeing the properties, meeting with sellers, buyers, brokers, current & prospective tenants, various EDC's and other city/state staff. Just to put a little different prospective on the process at a smaller shop compared to the larger shops above.
It is pretty rare, but we do put property debt every once in a while (REIT will usually buy a property using their revolving line of credit so they can quickly close a deal. Remember that REITs don't produce much cash flow after dividends are paid out. So, in order to pay down the line of credit, the REIT will do one of the following: 1) Raise more equity; 2) Issue long-term unsecured notes; 3) Place property level debt (more common for smaller shops that cannot raise unsecured notes).
Good thread, interesting to hear about other's experience in similar roles. I'll share a bit too. My experience is similar in some respects, different in others.
Me: senior associate, been with current firm for a little over 2 years. Company: small public REIT, $1.1bn balance sheet, owned properties are financed at the asset level. I'm not sure what you guys mean by AUM (total mkt value of assets controlled or total value of equity positions?) but whatever. We are a REIT in structure but our deals are more similar from what you'd expect from fund guys. Very small, flat, and CEO-centric deal team. We buy assets fee simple, originate mezz loans, buy existing loans, and put out preferred equity.
Deals come in the door mostly in one of a few ways:
-On-market - brokered by one of the large brokerage houses.
-Semi-marketed - small regional broker/banker - usually this is for preferred equity or mezz.
-Off-market - comes in from an existing partner, direct from seller/borrower, or its something we target by calling sellers/borrowers/servicers directly.
On market stuff all goes to and gets looked at by the junior team (currently me and an analyst, used to be another guy above me but he left recently). We read through all the email blasts / field calls / etc. and download OMs for deals that look interesting. Every week we give our CEO a pile of deals and he picks a few out and gives back to us. From that point, we talk to the broker and do some basic underwriting. If we think we have a shot at the deal we'll dig in deeper (comps, talk to local sources, dig into #s, discuss assumptions with our management team, visit property). Our CIO will review our underwriting and we'll put it back in front of our CEO. He'll give us a #, I'll write up an LOI and submit, same in best and final if it gets there. If we win the deal, on to DD as AcquisitionsGuy described. Sometimes the deal team runs that process, sometimes our Asset Management guys do. Deal team handles legal, but our lawyers are effectively in-house so its not too difficult to manage. For deals over a certain threshold we need to go to IC, in which case the junior team prepares a memo which the CIO edits for CEO approval.
Semi-marketed is the same. Junior guys are responsible for finding and saying in front of the small shops to make sure stuff comes are way. Since these deals are selectively marketed, if we pass on the deal we call the broker to explain why, to maintain the relationship. Some of these shops have relationships with our CEO or CIO and just call them direct.
Off market stuff usually comes to our CEO or CIO directly, through established relationships. Some of this is just restructuring/recapping deals we are already in, or deals that our partners in other deals are in. We have done some outbound marketing for deals which involves shudder cold calling, which the junior team handles. Not fun and often not productive, but very rewarding when it works out.
At my level I am responsible for setting up meetings with all kinds of potential deal sources, which I usually attend with our CIO. We do this not just in hopes of finding deals, but to stay connected and have 'friends' in different places that we can call on for info. Always easier to make a call to someone (for any reason) when you dropped by their office a few months back just to shoot the sh-t.
My hours are not bad, come in between 9-9:30am, leave at 7-8pm if we are busy, a little earlier if not. Of course the occasional late night happens when in deal mode. I worked for a BB bank out of undergrad - hours were awful, pay a bit better, but much happier now.
Comp obviously varies quite a bit, but from personal experience and what I've gathered here on WSO analysts generally range in the $60-$80K base range (with 15-20%+ bonus) and post-MBA associates are in the $110-$130K+ range with potentially much higher bonuses. Definitely depends on the shop and location though. Also seen pre-MBA associates in that $130K base range as well and know a handful of senior associates without MBAs making closer to $250K all-in or slightly higher (not necessarily the norm). Lastly, the general trend seems to be that true REPE shops/funds pay slightly better than developer/operator shops, but the latter group can also rake it in with promotes and other advantageous terms in JV deals with capital partners (i.e. 90/10 in, 80/20 out).
Very helpful thread, interesting to see how the process works at different types of shops. I work for a family office development company as a manager in acquisitions/development. The focus is primarily redevelopment/ground up construction for a mix of uses in major US cities. We try to focus on off-market deals as much as we can. We do not purchase any stabilized assets. While I am considered a junior guy here, I lead the sourcing of development opportunity which I really enjoy.
1) Internally research the city we think we want to enter. Have an ongoing list of top cities based on a ton of different economic points. The company also has stabilized assets in a number of cities, so we know the next batch of cities we want to enter. We pick the city, say Boston. Review the office market (rents, values, total square footage, density), retail market, hotel ADR/Occupancy/RevPAR,, pull comparables for what development sites are selling for, speak to a a land use attorney to start understanding the zoning code, etc. Spend a lot of time upfront vetting the city and then getting the approval from the partners to move forward. Assuming we like the city, we make some phone calls to brokers, introduce the company, what we are looking to do, get on distribution lists, etc.
2) Outline a very tight map of where in the city we want to be located. Use this map to really focus on this area. We usually like to try to find a smaller brokerage group (not the CBREs, Cushman, JLL, etc), and some guy who is hungry to knock on doors or line up a meeting for us with ownership groups.
3) Assuming we identify a property we think fits the box (location, size, etc) we can gut renovate/add floors to/ re-purpose, tear down, build ground up, etc, I add it to my prospect list and run some initial research on the property. Look up tax records, ownership information, etc.
4) Reach out to the broker to see if they can get in touch with the ownership group and set up a phone call.
5) Assuming they actually have interest in selling or entering into any type of deal (very low likelihood to even get the phone call in the first place or find a distressed, vacant or under-performing property) we will try to set up a call. If the location is a bulls-eye and it seems like it would be beneficial, we meet face to face with the group to show we are serious. If things go well, we will submit a Letter of Intent (LOI) to the broker. As this deal is off-market we usually have an agreement with the broker to pay them a fee as the seller might not.
6) Negotiating back and forth over price, terms, etc can take up to a few months. All the while, we are running economic models to project the redevelopment of the property. I put these together and send up the chain.
7). Assuming we agree, we give ourselves whatever is customary in the city for due diligence, say 30-60 days. We make sure we can confirm all of or as many of our assumptions in this time frame prior to closing. We speak with our land use counsel to review the plans the architect put together for the property. We have engaged engineers at this time, consultants, really studied the market for whatever use we intend to put on the site. Travel to the city, make sure we conduct environmental studies, traffic, etc.
8). Once the deal is closed and we are going through the entitlement process or if the property can be redeveloped as of right, the project is mostly handed off to one of our senior project managers. I stay involved but usually someone with more experience overseeing all of the local consultants heads it. I then move onto another city. Tend to focus on 2 cities at once, as its hard to find these type of off-market deals.
I left a lot of information out as it depends deal by deal. Company aims to do 1-2 deals a year so we tend to identify the city we want to be in and then go all in on finding the opportunity.
Happy to chat with anyone about our process. PM me.
Thanks.
Holy bejesus - let me get this out of the way then I'll shine some light on your situation.
The bad: 1) 3rd year analyst in NYC making $55k? How do you feed yourself? 2) You are clearly not at a REPE shop. More like a very shitty small "private investment shop" that seems to do anything but invest. 3) Sounds like a string of 3 poor choices, have you re-evaluated your decision making skills? Why do you keep going for these same terrible "acquisitions" jobs. You should not care about prestige of acquisitions title or working for a "REPE" shop, but rather the experience you'll gain executing live deals (AM, PM, dev, acquisitions, etc.). Seems like you're doing anything but working on live deals.
4) Do you need help identifying what makes a good job opportunity at a small real estate investment firm? 5) How big is your current firm? I can probably guess which shitty conman you're working for. NYC RE is very small world.
The good: 1) You have a job, it's way easier to find a new one while your employed. Don't waste time. Figure out where you want to be and what you want to be doing. 2) the market is "hot" a ton of legitimate firms are hiring - gear your resume to the role you want and make sure your technical skills and investment acumen can be demonstrated. 3) If you need help with resume, PM me I'll be more than happy to help.
Here ya go, just pulled this from another topic I posted in.
1) Much like jumping from a bank to a HF or traditional PE firm - the buyside/principal/equity side (whatever you want to call it) is generally made up of much smaller deal teams, less administrative and overhead. Each member carries weight at these firms. You won't be getting 21 vacation days.
2) Real money is made in real estate through ownership, fees and carry. you'll see a piece of this action at smaller firms at more junior levels (generally and assuming the guys you're running with aren't dicks). You may also get to invest your own capital in deals. If offered a job at these smaller firms, inquire how this works at their firm.
3) The success of these smaller firms are based on the following, understand these points before making a decision: a) Executive leadership - you will learn the business from who you are working for and with. This is HUGE. b) Ability to raise capital quickly and consistently - lifeline of execution c) Historical performance realized by investors - affects B d) Relationships and deal flow - the game. execution.
-Research and inquire about all of this. Figure out the quality of this opportunity on your own. If you want second eyes or need help in evaluating the firm feel free to shoot me a PM.
4) Smaller firms will give you exposure to the real business of real estate. Not just 1 small part, i.e modeling acquisitions. Depending on your end game this is huge. If you want to just make high salary and bonus then find a larger firm. If you are a real hustler and real estate player at one point you will head to or start your own 'smaller firm.' I will say, it doesn't hurt to get a larger firm's acquisition group on your resume.
5) Huge learning curve at smaller firms. Make sure you are the guy who is a self starter and can learn on your own. quickly and effectively. no babysitting at these firms.
Technically-speaking, "private equity" in real estate can encompass any number of real estate investors, ranging from high net worth buyers and local operators to big pension/money managers to the opportunity funds and megafunds that most people think of as private equity (high return strategies, Wall Street money, institutional shops that pay better).
Obviously there is a lot of private capital that buys multifamily, but you are right that the asset class is fairly simple and there are not a lot of great value-added opportunities (outside of some repositioning and development plays) in the space. If you're selling a small apartment building, the best buyer will often be a local high net worth investor looking for some cash flow, and the larger buildings tend to sell to REITs, pension funds, and other "core" investors. I work at an large opportunity fund, and we rarely/never (especially these days) see apartment deals that make sense.
On the other hand, if you are focused on getting into real estate, you need to start somewhere. The reality is that you will not likely find a route into one of the major opportunity funds, since they tend to hire analysts from real estate investment banking programs as pre-MBA associates. RE PE funds tend not to care about the MBA nearly as much as generalist PE funds, but those that do will look for MBAs with pre-MBA RE PE experience.
So with that said, if the opportunity is decent, the team has a good track record, and the pay is okay, you might think about getting into real estate through this opportunity and look to parlay that into something more interesting to you further down the road.
Many real estate deals are done in the form of JVs where there is a capital partner (RE PE fund, institutional investor, sovereign wealth fund, pension fund, high net worth investor, etc.) and an operating partner or asset manager (often a local group with strong operating experience).
The role of the operator is to know the market. A good operator has strong relationships with local brokers and owners and ideally may have access to off-market opportunities. The operator has a good idea of what tenants are looking for space (such as other buildings' tenants whose leases are expiring), the competitive landscape (what terms other landlords are offering), and an eye for properly positioning a project for the market. A good operator should also know how to maximize cash flow in a project by managing expenses and maximizing ancillary revenues (like parking, storage, signage, etc.), and if there's a repositioning component, they should be good at keeping construction on track and on budget.
In an acquisition where I'm working with an operating partner, I'll rely on the junior guys at the operator to provide me a lot of the local market intel. They can tell me what they think tenants like about a property, and what some challenges are that need to be addressed. They have a view on rents and expenses, ways to increase income, and where money should be spent. The operator usually puts together an Argus and some preliminary cash flow runs. I'll rely on some of that information, but work it into my own model to see how returns look. I see it as my job to understand the risks and downside scenarios, where I think operators often only look at the upside (or, at their worst, some operators just care about the fees they'll get paid).
When doing a real estate deal, I think the model is a smaller part of the equation than people on this forum think. It's really not that hard to model cash flows; the challenge (and the rewarding part) of being a capital partner is to understand the risks to the business plan and "how" money is being made (a great model helps you to visualize the moving pieces more readily). If your model is saying you'll hit a 20% IRR...how much of that is driven by rent growth? cap rate compression? leverage? What's most likely to go wrong--and how likely is that? Working on this side of the business, I think I've learned a lot about how to look at the numbers and decide if I think the story behind them makes sense. When working on distressed deals, there are often complicated legal aspects to the situation--weird leases, weird debt, weird litigation, etc.--and so on many deals I also spend a good deal of time working with lawyers to understand what's going on. At the culmination of the process, it's my job to put together memos and materials and present part of them when my deal team take a deal to investment committee.
Acquisitions- Hired to be Fired? (Originally Posted: 05/30/2015)
I work at a small real estate investment shop as an asset manager. We have 17 buildings in major and secondary markets along the east coast, probably around $750mm AUM. I started here about 8 months ago along with an acquisitions guy. He was formerly an analyst at a major player and left a pretty good career to join our shop. A few days ago I was shooting the shit with one of the principles of the firm and he was talking about firing the newer acquisitions guy (we currently have 2) because we just finished a major buying phase and his services were no longer needed. He said this is how they always do business once they finish up a major purchasing round.
This startled me a little and I brought it up in conversation with our office manager who I feel I can trust and she basically told me that this is how they always conduct business and they don't tell the acquisitions people that they are basically coming on as a temp employee and then can them once the buying round is complete.
Is this normal throughout the industry? I guess it makes sense from a company perspective if the firm is not actively pursuing multiple deals at once. Ethically I feel like they are completely fucking this guy since he left a solid job and career path to join what he thought was a better situation for himself.
Junior guys in acquisitions are the first ones to go during a downturn. We're not in a downturn (at least not yet). So is this normal? Not sure. Am I surprised? Not really. People in RE are shady - as I'm sure you're learning. If I were you, I would start questioning your firm's senior management. I'm under the impression they're not too fond of analysts, and see them as a liability. In RE you have to run a clean (and ethical) shop. Your reputation is on the line. Blackstone rewards high performers (regardless of their position) and the results prove it. Everyone wants to do deals with them. American Realty is in hole right now and everyone is overly cautious.
Sucks for your friend though. Don't get sucked in to that poisonous environment and become a scumbag. Remember, you're not safe either.
It's common to staff up while in an acquisitive phase and some smaller places will hire knowing they're going to cut back in the future, but not for an 8 month gig. I've seen it more along the lines of a multiple year plan so the person hired knows there's a good chance in 2-3 years it'll be done, but not 8 months. Or I've seen more senior people join a friend/former co-worker's shop knowing it will be a short term gig to deploy capital but the employee knows that they're more of a consultant and it's just a bridge for them. The key is that they both know it's most likely not a forever job.
Doing it to a younger person still trying to establish a career is shitty. I'd start looking for another job. Like stated above there are some shitty characters in RE but there are scores of good ones, and not only at the Blackstone level. Look for ones with a decent rep in the industry. Typically people who fuck over employees are also the ones willing to fuck over everyone else.
Distressed, value-add, and opportunistic have flexible and overlapping meanings as they apply to real estate. Value-add and opportunistic are often used to define the return targets of PE funds. Opportunistic implied a very high return target (think 20%+), core implied a very low target (sub-10%), and value-add was somewhere in between (~15%). As different strategies have come in and out of favor and yields have fallen, sponsors have started to blur the lines of separation.
At the same time, these terms also tend to imply a certain strategy, particularly the term "value-add." The notion of that strategy is that the value-add buyer is buying some sort of transitional real estate that needs some improvement/lease-up. It often implies that one is turning an under-leased property into a stabilized, core asset. "Opportunistic" implies that a buyer is targeting unique and special situations that yield underpriced assets...note that there's no reason an "opportunistic" acquisition can't require a good deal of "value-add." However, buying a vacant land parcel for entitlement/development or making a momentum bet on a market (with no intent to do much work/leasing) could be opportunistic, but probably wouldn't be called value-add investments.
As for distressed opportunities, I generally define distress in two categories: financial and operational. One tends to beget the other, and often they create a vicious circle. A vacating tenant, weak market, obsolescent space, or structural flaw are all causes of operational distress, which can lead to a borrower unable to pay debt service or a decline in value of a property below the balance of debt. When a property is in financial distress, a non-recourse borrower has little incentive to put more money into the project, which can lead to more vacating tenants, deterioration of quality, and operational distress. Distressed buyers will attempt to remedy the situation by taking control of the property at a discounted basis (perhaps by buying the debt, recapitalizing the partnership, or through a foreclosure or short sale), curing the financial distress, and invest the necessary capital to solve the operational distress. Ideally this brings the project to a condition that is attractive to core buyers with a lower cost of capital.