Investing in Middle Market Real Estate: Q&A With Kingbird’s Ken Munkacy
Senior Managing Director, Kingbird Investment Management
August 1 2019 Family office investments in real estate have traditionally focused on either top-tier luxury real estate or entry-level affordable housing located in major cities. Kingbird Investment Management, the real estate subsidiary of Puerto Rico-based Grupo Ferré Rangel–a century old, family-owned investment holding company–sees this as an opportunity to bet on workforce and student housing in overlooked cities with less competition.
The strategy is the brainchild of Kingbird’s senior managing director Ken Munkacy, a real estate investment veteran with 25 years of experience working across 12 countries. In this interview, he outlines Kingbird’s investment philosophy and offers a contrarian argument for underappreciated real estate across the United States and Latin America.
What is the investment philosophy and underlying thesis of Kingbird’s real estate portfolio?
We focus on workforce housing, which caters to the space between the affordable and luxury markets in secondary and tertiary markets. We enter deals in cash with reasonable leverage, shooting for between 14% to 16% net returns. Kingbird invests its own capital, along with that of its co-investors and operating partners, to capitalize on these market inefficiencies to achieve stable cash flow and value appreciation, while minimizing downside risk exposure.
Our focus is to create long-term value through careful stewardship of investments and assets. Kingbird seeks to create a portfolio that balances downside protected returns with upside oriented higher asset level returns. Our ability to move up and down the capital stack, from general partner and co-general partner, to limited partner, preferred equity and mezzanine debt positions, provides opportunities to improve risk-adjusted returns as markets evolve. Kingbird’s unique partnership network with local property managers enables us to maximize operating efficiency, cash flow and value.
With family offices and wealthy investors focused on megacities and prime real estate, is the multifamily workforce apartments and student housing markets less competitive? Is it easier to find deals?
Yes, absolutely. There is less competition and you find better pricing, as the risk is often mispriced. The secondary markets we choose to invest in have the same growth dynamics as major markets in terms of job creation, household formation and demographics that attract millennials.
What impact does the cost of education in the United States, specifically the debt burden and historically high cost of tuition, have on student housing across the country?
Student housing is an adjacent investment to workforce housing. So there are two important points to consider this when answering this question: the need for affordable student housing and the “indebted generation” driving more demand for workforce housing, thus reinforcing our workforce housing strategy.
More than a third (36%) of college students lack stable housing, while 9% report being homeless, according to a survey published by researchers at Temple University and the Wisconsin HOPE Lab. As costs of higher education continue to rise, and a sizeable percentage of the student population lacks stable housing, there is significant opportunity to develop more affordable housing options for students.
Additionally, many colleges and universities have undertaken major construction programs over the past decade, banking on new student housing as a recruitment tool amidst enrollment pressures. Many campuses are replacing legacy dormitory-style housing with the amenity-rich suites and apartments—including those designed for students with families.
The biggest barrier for would-be first-time homeowners is financing the purchase, and for millennial Americans that barrier is even greater. Student loan debt is now the second highest consumer debt category, behind mortgage debt and higher than credit cards. 2016 college graduates were the most indebted class year–graduating with $37,173 of student loan debt per student on average. The average 20-something makes a $350 loan payment each month. Even more, more than 40% of student loan borrowers are expected to default by 2030.
American renters overall see affordability as a major obstacle to being a homeowner. According to Freddie Mac Multifamily Renter Research conducted by Harris Poll in 2017, seven out of 10 renters across all generations believe renting is more affordable than owning a home. And while financial reasons are a big reason people rent instead of own, one-third of the Freddie Mac poll respondents said “buying a home is just not a priority for me right now.”
These factors create major barriers to home ownership, and even affording Class A properties in top markets are sometimes unattainable. More and more, recent graduates are seeking job opportunities in secondary markets that offer many of the same work-life amenities as major markets, but at a fraction of the cost. These factors contribute to our projection that the need for workforce housing in secondary and tertiary markets will only continue to accelerate.
A significant portion of the portfolio is located in Latin America. What are the unique challenges of investing in this part of the world?
Corruption, stagnant economic growth and lack of financing are all major challenges. This, combined with the lack of real wage and income growth, income disparity, regulatory delays, tax implications and high cost of interest, create a risky investment environment. When you consider the impact of taxes and currency from a risk-adjusted standpoint, none of the markets offer a more compelling opportunity than what you’ll find in the U.S.
That’s not to say there aren’t pockets of opportunity, but you are chasing very high risk. When currency comes out, it’s less than what you get in the U.S. The “emerging markets myth” is playing itself out. Foreign investors get hit on foreign exchange and taxes. So this, combined with the fact that things take longer and the system is much more corrupt, means investors should proceed with an abundance of caution. There is also a lack of real market data, so often times you are shooting in the dark.
Kingbird executes a data-driven, highly market researched strategy. The Federal Reserve is already talking about reducing interest rates, further bolstering already low-cost financing through low interest bonds in the U.S. There is also real economic growth and household formation, which is a set of favorable factors you just don’t have overseas.