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US house prices won’t go any lower: Morse

Returns on US property assets are set to spike, says Asia veteran Robert Morse, who is tapping the region’s institutional investors for a second distressed real estate vehicle.
US house prices won’t go any lower: Morse

Having achieved an internal rate of return of 24% on its first private equity real estate fund, ROC Bridge Partners is planning a roadshow to Asia to offer a follow-up fund to local institutions and high-net-worth individuals.

The firm has a target of $500 million and has signed a feeder fund deal with Sydney-based affiliate Spire Capital.

ROC Bridge invests in rundown residential buildings in densely populated US cities. Its first closed-end fund – called ROC 1 – was launched in 2009 and topped out at $140 million. It is fully invested, and has already exited 13 of its 36 properties.

ROC 2 will follow the same formula of buying large-scale apartment blocks, known as multi-family complexes, where the apartments are held on one title and the residents are all rent-paying tenants – much like a commercial office tower. In many cases the buildings have been in receivership for several years, have fallen into disrepair and have occupancy rates as low as 40%.

“We buy complexes which are either distressed or have other identified needs, stabilise and improve the assets, boost occupancy rates to above market levels and then sell them on to mostly institutional buyers,” explains Robert Morse, chairman of ROC Bridge in an interview with AsianInvestor.

Morse says the firm handpicks its targets, investing in just three properties for every 60 it reviews each month. It applies up to 60% leverage on an asset-by-asset basis.

“When you get it right, it can be extremely rewarding. We recently sold an asset from the first ROC fund that returned an IRR of 60% and a multiple of 2.3x equity invested.”

Morse believes the US real estate market has turned a corner. “Property prices have already bottomed out, but that doesn’t mean the recovery will be overly quick. I expect the residential market will do better in the near term, because there is still some overhang in the commercial office sector.”

A roadshow to Asia is planned in late April, says Morse, who has long-standing contacts in the region stemming from his time as CEO of Citi's Asia institutional clients group from 2004 to 2008.

After leaving Citi, he partnered two former colleagues to establish Primus Financial Holdings, a private equity firm that was set up to invest in financial services assets across Asia. But the firm encountered regulatory hurdles and was hampered by competition for deals. The fund closed at the end of last year.

The chief executive of ROC Bridge, Don Hartman, also has experience in the region, spending more than 10 years in Asia working for Citi, Salomon Smith Barney and UBS Warburg.

Around 35-40% of the capital in ROC 1 was sourced from Asia, and Morse expects the same level of interest in the second fund. “Some will be repeat buyers and some will be new,” he says, explaining that a number of HNWI, corporate investors, pension funds and foundations have already committed capital, but declining to give names.

The local fundraising effort will be bolstered by an affiliation with Spire Capital, a Sydney-based investment manager run by partners Matthew Cook and Dale Holmes. Spire is now launching a feeder fund into ROC 2 that will target institutional and retail investors in Australia and Singapore.

“Private banking clients in particular are seeking assets that have a low correlation to listed property and equities. They know there are bargains to be had in the US, but they don’t know how to access these opportunities in a tax-efficient, cost-effective manner,” says Holmes.

Investors are likely to be attracted to the fund as a yield play. ROC Bridge distributes all of its net operating income in quarterly payments, and ROC 2 is expected to have an annual yield of 9%.

Holmes says distressed US apartment block assets have gained traction in the Australian institutional market following a $50 million allocation to the Brookfield Fairfield US Multi-family Value Add Fund by the government-owned Future Fund last December.

“The key difference between ROC Bridge and other PE real estate funds like Blackstone and Carlyle is that ROC Bridge doesn’t outsource its property management to a third party,” notes Holmes. “It has an internal team that improves cash flow from an asset by employing around 700 people to handle everything from leasing and maintenance to project management.”

Spire hopes to raise $100 million for its feeder fund and is offering two classes of units – one for retail investors and the other for institutions. It has until the end of 2013 to hit its target, unless ROC Bridge reaches its hard cap of $500 million before then. The fund has a six-year lock-up.

¬ Haymarket Media Limited. All rights reserved.
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