Another recent acquisition, with one of its operating partners, was an off-campus student housing property across the street from Georgia Southern University. The Class A 2006 construction was an attractive investment because the university had had a 22% enrollment growth rate over the past five years that was expected to continue, Gates says.
Virtus recapitalized the existing equity, then converted its equity into preferred equity, which would give it both priority on cash flow and liquidation preferences in the event the property had to be liquidated. The firm underwrote a 12% yield in the first year, but has been generating closer to a 15% yield, according to Gates. It is now improving the property and increasing rental rates in order to grow the net operating income. It will ultimately exit the property sometime in the next couple of years.
The firm's newest fund, the $500 million Virtus Real Estate Capital LP, will invest in all four property types. For the RIA share class, the targeted yield is about 9%, and the targeted IRR for a five-year hold is in the high teens to low 20s. The new fund is unusual, Gates says, in that it's a limited partnership and provides public reporting. This structure is intended to be attractive to both high-net-worth and institutional investors.
"It's still private equity real estate, but by providing public reporting, it gives greater transparency, and that allows us to have an unlimited number of investors in our retail share class," Gates says. In addition, he adds, the investors, as limited partners, ultimately own the underlying real estate, so they get all the pass-through benefits of depreciation and accelerated depreciation.