Received an Offer Need Advice!
Hey all. I received an offer from a small RE PE startup with a $250 MM portfolio looking to double in 3-5 years. They primarily buy medical offices and I would be their first investment analyst. Prior to this position, the principal's did all of the analysis. I'm currently at a boutique sell-side ER shop, and need to decide whether I'm going to take the offer.
I mainly am curious what the risks are to this specific type of real estate acquisition especially given where we are in the real estate cycle. Can anyone please advise?
Thanks all!
From my perspective (IS broker turned REIT acquisitions analyst) the market is starting to slow and being on the buyside is a good place to be, as long as you have the capital needed to do deals. It does seem like debt financing is getting harder to come by, so ask about his sources and the debt/equity ratio of a typical deal. Where does he get his money and does it look like it will keep flowing? Also, you should look at the history of some of their properties to see if the principal knows what he's doing. If it does look like he has his shit together then medical office as a product type definitely seems like it has a healthy future. Finally, I would also make sure you he's offering a bonus in addition to salary.
Thanks for the reply. I was afraid of the market overheating, so good to hear the buyside is a relatively safe place. From what I understand, this firm levers up at 4.5%-5.0% and they return 8% to equity holders with a 12% IRR. Revenue is 3% of the deal price and a 70/30 split on any return above 8% (firm gets 30). In order to keep the wacc low and roe high, it is primarily debt financed. One of the principal's said their deals get fully subscribed in usually less than a week and no more than two weeks. What kind of carry is appropriate to expect given my limited RE experience?
Can't speak to carry unfortunately. Sounds like a good set up provided they can continue to access sufficient debt financing.
Thanks so much for your help. If anyone else can chime in, please do!
MO, like hotels, is a niche product. I would be concerned mostly with the principals histories. When lending standards start to tighten, it is their track record and relationships that are going to help them weather the storm. If they have 25+ years of experience somewhere in MO and just broke off to do their own thing, that is one thing. If they are all 30 year old former tech entrepreneurs just getting into RE investing, that is something else.
Buy side can be relatively safe because AM fees should be sufficient to pay base salaries. However, this is when people start to tell each other to stop counting on bonuses. Bonuses are discretionary and it may be low or even non-existent in the "bad years."
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