The Investment Case For Midwest Workforce Housing, With Revitate Cherry Tree

Revitate Cherry Tree was a presenting partner at Alts Expo 2022, a one-day virtual event hosted by AltsDb on December 8, 2022. In this webinar, Kunal Merchant, Chris Marsh, and Robert Lang present Revitate Cherry Tree Multifamily Fund I, LP.

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Webinar Presenters

Webinar Highlights

  • Why a fund focused on workforce housing in the Midwest makes sense in the current uncertain economic environment.
  • Characteristics of workforce housing as an asset class, and how it differs from affordable housing.
  • The investment thesis for workforce housing, including the lack of new product coming online as a result of elevated construction prices.
  • Which factors determine the most favorable MSAs in which to invest in the current market, including population growth and employment diversity.
  • Unique elements of the Revitate Cherry Tree strategy, including a known portfolio of assets, and tax benefits resulting from bonus depreciation in 2022.
  • Live Q&A with webinar attendees.

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Webinar Transcript

Kunal: We’re really excited to be able to present to you today. My name’s Kunal Merchant. I’m the COO and a partner with Revitate Cherry Tree, which is a multi-family strategy that our firm out in Newport Beach has. And what we wanted to do, is kind of walk you through the highlights of our fund.

There’s three of us. There’s Chris Marsh, who’s really the leader of this, our Co-Founder and General Partner. Here’s myself, COO, and then Rob Lang, our Managing Director of Commercial Real Estate joining us. And at a high level, this is the summary of our fund. It’s in market right now. We’re a multifamily housing strategy focused on workforce housing in emerging markets in the Midwest.

It’s an institutional-quality firm and principals with over 30 years of experience in multifamily and in commercial real estate. The two gentlemen with me have a combined many decades, I won’t age them, but many, many decades of deep expertise in multifamily and real estate more generally. The advantage to you as an investor right now is in a world of uncertainty, there’s a lot of certainty in this fund right now.

We have a portfolio of about $100 million of assets, 745 units in 5 communities, with the NOI that’s exceeding performers by at least 10% and likely higher. As I think a lot of folks here know, real estate is particularly agile when it comes to inflation. Workforce housing, we believe, is especially good on that lens. And this year, there’s significant tax benefits, which Rob will talk about.

Our debt financing is extremely favorable in the current market. And we’re gonna be in a position, we believe, to provide cash distributions to investors as early as quarter one of next year. So, in terms of the overview of the fund and the firm, and the three key folks are Chris, and my colleagues Alex Bhathal and Lisa Merage, who formed Revitate Cherry Tree after years of experience in private equity, in real estate, and business to acquire, reposition, and manage multifamily assets.

So that this is the big focus of the firm is multi-family, and we’re looking for opportunities that generate risk-adjusted returns over a five to seven-year hold period, with a primary focus on workforce housing in the Midwest, and target checks of $10 to $40 million. And as you can see on the right here, just a tremendous amount of experience in terms of multifamily units managed, equity managed, etc.

So, this is a very, very strong team with decades of experience in a really targeted way. So, I’ll turn it over to Chris to kind of walk through how we define workforce housing and the investment strategy.

Chris: Thanks Kunal, and thanks again for having us this morning, Jimmy. So, workforce housing means a lot of things to a lot of different people. So, let me unpack it in terms of how we regard or define workforce housing. The official definition of workforce housing is that it caters to households making between 60% and 120% of area medium income, or AMI as it’s referred to in the business.

So ostensibly, middle-income American families. So, these are folks who are employed in professions such as healthcare, manufacturing, logistics, education, local government, perhaps entry-level white-collar workers. But characteristically, these are renters by necessity, not choice. But it’s different from affordable housing. So, I wanna distinguish workforce housing, which is market-rate housing from affordable housing with a capital A, which is typically government-sponsored housing in some form.

So, think of it instead, as attainable housing for middle-income American families. So, by that, I mean, it’s sort of naturally occurring affordable housing. So typically, B and C class assets by dent of their vintage. These are 70’s, 80’s, perhaps 90’s vintage assets that we’re buying and otherwise, perfectly good, established residential suburban communities with great schools, etc.

So, that’s our playbook in the Midwest. We think it’s a great differentiating strategy for those predisposed to real estate investing, and certainly, multifamily. Why we like this space in particular, the check on the upper left there, supply-demand imbalance. So, we’re buying these assets at 60 cents on the replacement dollar. No one’s in the business of recreating these assets, because you can’t afford to its today’s construction prices.

So, we actually like that on the part of the investor. There’s no new product coming online except for assets that are simply aging in place so as to enter this space. And what we have found is over the past decade or so, with the preponderance of value-add competitors coming into the market, many of the assets that we’re otherwise sourcing are being taken out of circulation, heavily invested in sort of CapEx and repositioned so as to be out of what we define as the workforce housing space.

So, once again, they’re either aging out of the space through economic delinquency, or being taken out of the space through different strategies, and no one’s building anymore. So massive supply-demand imbalance to the favorable side in times of economic uncertainty. And I think this time qualifies right now, demand for these assets only increases.

If I’m staying in a class A community, I get the option to move down. If I’m living in workforce housing, that’s my shelter, that’s where I’m living. So, demand is off the charts, and you’ll see some of these characteristics, I’m not gonna read through this entire list. But high occupancy, high renewal rates, or really, manifesting in very favorable returns as rubble cover momentarily.

So, steady, predictable cash flows, the potential for strong risk-adjusted returns. And we bring, as Kunal said, an institutional quality team to manage what is otherwise regarded as a sub-institutional asset class. And we find that when institutional expertise is brought to bear on what is effectively a mom-and-pop business and done at scale, that drives outsize returns for investors.

In terms of where we buy, this is not intended to be wholly prescriptive, but we look at many factors in determining the markets that we come to like and drill down deeper, primarily among them shouldn’t be any surprise to anybody. Certainly in the multifamily space, we look for sustained population growth over time and forecast population growth. We look for corresponding employment growth, and we look for employment diversity.

Good diversity of employment is a good thing, especially in what we’re regarding not too many decades ago, is largely agricultural market. So, when we find that we check all those boxes, and, of course, drill deeper into other aspects, we then look at the affordability. How affordable are workforce housing rents correspondent to that area’s median income?

And coming from California right now, it may not surprise California listeners to learn that it’s not untypical to find 40 or 50% of one’s income is spent on housing. In the markets we’re shopping, that number’s in the teens. So that give us lots of room to be able to expand rents and grow rents over time, as well as maintain that precious occupancy.

So, we like Kansas City, Missouri, we like Columbus, we like Cincinnati, we like Louisville, we like Indianapolis, and kind of solid markets that are radiating out from those two that demonstrate all of those characteristics and look set for continued high performance over time. Over to you.

Rob: Chris, thanks. We’re gonna wrap this up in the next couple of slides to tell you why is this a compelling investment for you or your family right now. We have a known portfolio, there are significant tax benefits. We’re gonna start distributions as early as next quarter, and this portfolio provides excellent interest rate and inflation protection.

Start with the first one. Known portfolio, very easy to understand. You can see five assets, it’s in three states. We’ve got 10% rent growth on renewing leases and expiring leases to new leases at 10% rent growth. That’s higher than proforma by over 10.4%. And that’s allowed us to increase our IRR projection for the remaining 6-year expected life of the fund to over 20% to you as the investor.

In addition to this, on the next slide, you’ll see that we’ve done a cost segregation study for each of our assets due to the 100% bonus depreciation that’s available in 2022, for a certain portion of this investment, you’ll get 76% depreciation. For every dollar you put in, there’ll be 76 cents of depreciation that’ll show up on your K1 for 2022 based on our current forecast, and an additional 43% over time.

You’ll need to talk with your tax advisor to determine whether you can use these benefits but a lot of people cannot find them useful. Let’s go to the next slide. Again, we’re gonna be doing cash distributions as early as next quarter. Our goal is to do a 1.5% per quarter distribution, which is 6% a year. And we’d hope to increase that over time as cash flow permits. All these properties are operating, existing, and cash-flowing today.

Next slide, please. As you know, interest rate protection and inflation protection are really key themes right now in this time of volatility. We have five loans, one for each property. They’re all done by Fannie and Freddie’s, so they’re federal agency loans. They’re all fixed-rate debt. They have five years of interest only, and the weighted average interest cost is 4.02%, which as all of you know is an excellent rate for a long-term loan.

And so, we feel very good about where this portfolio is positioned. It’s been bought right, it’s been financed right, it’s being operated right, and we really like this portfolio and the team that’s operating it. Kunal, I’ll let you wrap this up.

Kunal: Yeah, so just in closing, three questions, why workforce housing, why Revitate Cherry Tree, and why now? Workforce housing, incredibly stable asset class relative to where we are, steady cash flows, less risk, and reliable renter demand. Why us? Is a proven team with the decades and decades of experience, you know what you’re buying in this portfolio, the favorable debt financing that Robert just mentioned, and the potential for competitive returns.

And then why now? Obviously, inflation protection. I think the 2022 tax benefits are particularly appealing. That expires on December 31st, so that’s why we’re really encouraging folks to get in before year-end. And the intent is to close the fund relatively soon.

Our next closing will be December 31st. So with that, if you have questions, we’ll take ’em right now. And then, of course, [email protected] is also available. But Jimmy, I know I’ll hand it back to you, and thanks everybody for the time.

Jimmy: Perfect. Well, thank you Kunal, Chris, Rob, we really appreciate your time today. We do have a few questions. First question is, “Are you gonna make this deck available for download or…

Kunal: Yeah.

Jimmy: …Or do you not…?” Yeah, you will. Okay. So, Sandy, we’ll get the deck distributed for everybody. A lot of the funds will share their deck with us and we’ll post those to our website by end of day today or tomorrow. We’ll get those out to everybody. Some funds won’t, so that’s why I’d ask there. One question is, “Where are the five assets located and how many units are there in total?”

Kunal: Yep. So, 745 units with three communities. Let’s pull that up here. Y’all are testing my Excel on the fly. There we go. So this is where they’re located. Chris, you wanna take this real quick?

Chris: Yeah, so somebody asked about K1s in different states. So, we have three different states here. We got Kansas, we got Missouri, and we got in…excuse me, Indiana. So, we’re seeking to cluster so that over time we build portfolios and that we have scale in MSAs that we like. But there are five assets, 745 units in three different states currently.

Jimmy: And we had a couple of questions about how much debt is on the portfolio right now. What’s the leverage percentage?

Rob: Excellent. Kunal, can you bring up the slide that we’ve shown with the detail on the deck? The leverage is 72.1%, so we were able to get excellent financing from the federal agencies. And if you think about it, their mission is really to provide housing for the average American. A lot of the financing they’re doing right now is for very expensive highrise luxury apartments that are $4,000 or $5,000 a month.

So, they love this product, they’re very enthusiastic. We are able to get fixed-rate debt for each of them. The total debt is about $66 million right now, and again, a 4.02% weighted-average rate.

Jimmy: Excellent. we have run outta time, we won’t get to all the questions. But real quick, someone requested a PPM. “What’s the best way to reach out to you guys to get that PPM?”

Kunal: Sure. Yeah, just email [email protected] So, this is the easiest way. Just shoot an email over to [email protected] and we will get everybody the information links they need, including the deck we just went through.

Jimmy: Fantastic. I’ve just posted that in the chat as well. Well, we’ve run outta time, but Chris, Kunal, Rob, really appreciate your time today. Thank you for participating on “Alts Expo.”

Chris: Thank you Jimmy.

Kunal: Of course. Thanks everybody.

Rob: Thank you very much.

Chris: Take care.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.