Calvera Shifts Focus to the Long-Term

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Brian D. Milovich

Managing Principal, Calvera Partners

Even though the market today seems uncertain, and the news cycle is on edge with every announcement by Fed Chair Powell, our enthusiasm is high! Back in 2010, we launched Calvera out of the Great Financial Crisis without capital, a deal, or long-term vision. All we had was a belief that there was going to be a major opportunity in the apartment market. Our initial focus was on our backyard, the San Francisco Bay Area. In that market, there was a big spread in rents from renovating units and rebranding properties, and we (and our early investors) did quite well. In other parts of the country, cap rates were high (i.e., 5.5-7.5%) because apartments never really generated out-sized returns. Today, I’m getting similar vibes to when we started Calvera. There are opportunities starting to trickle out with more on the horizon. The market fundamentals are very different today than in 2010, but the opportunity is the same.

My other co-founders and I would often debate about the right structure for our investments. We started off buying properties and fundraising on a one-off basis. Then, we started creating discretionary investment funds to purchase portfolios of properties. These were, and are, the two main structures for investing in private real estate. Each method has its merits. However, we were never really satisfied with it. We always asked ourselves, “if it was 100% our own money, how would we invest?” The answer was always that we’d invest like the smartest people in our market. These individuals held real estate for the long-term, accumulated assets, were sensitive to taxes, refinanced when appropriate, had deep broker and banking relationships, and only sold properties for tax planning purposes or to upgrade the portfolio. There are people like this in every single market across the country.

If that’s how we would invest our own money in real estate, why couldn’t we do that for our investors? Private and non-traded REITs existed, but they were a terrible value for investors. For every $1.00 contributed, only about $0.85 would actually be invested in property, with the rest going to commissions and fees. High ongoing fees and conflicts of interest were the norm. This was not a structure we could offer to our investors because it did not align with our values. Then, Blackstone and Starwood created their own non-traded REITs. Their size reduced the fees to levels commensurate with standard investment funds and provided new mechanisms for investors to redeem their interest over time, as well as for sponsors to recognize their incentive allocation without having to sell assets. They gave us the playbook for structuring the investment vehicle we always wanted to offer, the Calvera Income and Growth Fund.

Because the structure of our latest fund is different, we get asked if we’re changing our strategy. Simply put, no. We started as value-add apartment investors and continue to look for ways to enhance the properties we own through smart boutique hotel-like branding and amenities, and operational improvements. Our enthusiasm is high because we’re now seeing potential acquisitions where we can implement a new form of adding value—technology upgrades, modern color palettes, and sustainability improvements. These pay off over the long-term and can help preserve and grow cash flow.

Our focus is shifting from the short-term to the long-term. In the short-term view, which is what our other investments have, we focused on renovating, repositioning, and then selling apartment properties. The long-term view focuses on growing cash flow through targeted improvements and choosing markets or locations that are expected to appreciate over time. An asset that cash flows well doesn’t need out-sized appreciation, though any time a market resets, like it is doing now, the likelihood increases that values will appreciate significantly from depressed levels. This is what is so exciting. We’re on the cusp of price discovery in the apartment market and there could not be a better time to begin a long-term strategy and invest like the smartest owners.

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