Group RMC is a family business, a private partnership, and a co-investment company that focuses on underappreciated institutional-quality office properties across the US in non-gateway markets. In this episode, Evelyne Massa, the Vice President of Private Investment at Group RMC, sits with Jim Pfeifer and shares the investment philosophy and principles of Group RMC. The pandemic has made office properties over-looked asset class, but there are many opportunities for buyers with a long-term outlook. Evelyne discusses how Group RMC is taking advantage of the perception that office is a distressed asset class by staying consistent and implementing their long-term plan of buying and holding long term. Listen in to learn more about investing in office buildings, why now might be a great time to evaluate this asset class and where the future for office is heading.
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Back to the Office with Group RMC and Evelyne Massa
I’m excited to have Evelyne Massa with us. She is the Vice President of Private Investments at Group RMC. It’s a family business and a private partnership co-investment company. They’re focusing on underappreciated institutional-quality office properties across the US in non-gateway markets, primarily in the Midwest and Southeast. I was fortunate to be able to tour some of those properties and get a sense of what Group RMC is doing. We’re excited to have her talk to us more about the office asset class. Evelyne, welcome to the show.
Thank you much for having me.
It’s great to have you. It’s nice to connect again. What is your journey? How did you get into finance, real estate, office and all of that? If you can take us back to how you got here, that’d be a great place to start.
I took the scenic route to real estate investing. To give you context, our family has been investing in real estate on the side since the late ‘80s. We didn’t come from any kind of wealth. We didn’t have any family legacy. We had to build that up. My dad had a successful business in the financial services industry. We’re from Montreal, Canada originally. That’s where I grew up and still live. He wanted to know, “How do these big families accumulate wealth? How do you grow passive investments? Have your money worked for you? You have buildings by buildings. How do you get there?”
He had a mentor in the Montreal real estate community. They started to do some deals together, put a few investors together, buddies, friends and brother-in-law, “I know what your sister wants. No problem.” They started becoming active in real estate but as a side gig. The first real acquisition window they took advantage of was during the savings and loans crisis down in Texas in the late ‘80s and early ‘90s. You had a situation there where the institutional money would not touch it with a 10-foot pole but you had a lot of value and incredible pricing. You had a bunch of private investors who went down there, did well for themselves and made small fortunes.
This group of investors that my dad put together did very well. Eventually one of Sam Zell’s REITs came knocking and they had a nice exit. Everybody went down back to their day jobs. Another acquisition window opened up where you had this opportunity to buy $1 for less than $1, the value investing dream. Here in the French-speaking part of Canada, there was a movement for the province to split from the rest of the country. We speak French here. Culturally, it’s different. That created a lot of political uncertainty. The real estate market crashed. No transactions were happening. Everybody was very unsure. The banks left Montreal. They went to Toronto. There was a great buying opportunity. It’s another moment where a crisis is a terrible thing to waste.
A group of friends and families got together. At that point, we started focusing on office real estate and buying incredible deals and making no sense pricing with huge cash-on-cash in very unsexy markets places you wouldn’t necessarily find on a map. Granby, Sherbrooke, Drummondville, Quebec City. These smaller markets were where the yields were incredibly attractive and where the crowds weren’t showing up.
They did well there. They sold most of that portfolio to a Toronto-listed REIT. They came knocking in the mid-2000s. After that, everybody sat on their hands and waited. The next window that opened up and where group RMC as it is was born was after The Great Recession of 2008. My dad was American. He always loved the states. We always wanted to somehow skim a little bit off the top of the American Dream. We wanted it. It gives us a little crumb. We started poking around the Midwest. My dad got his Executive Doctorate at Case Western Reserve in Cleveland.
That helped us to understand the incredible strength of these markets and how overlooked they are. You’ve got the Cleveland Clinic, a world-class university campus, parking lots are full and this vibrant economy. This is a huge economy and a huge opportunity in plain sight. Everybody sticks to New York, LA, Boston or gateway markets.
That was a light bulb moment. We started looking around Ohio, Indianapolis, suburban Chicago and these places to look for interesting acquisitions. We saw that there was a huge opportunity there. In particular, we were seeing that institutional grade office portfolios, super high quality and high cash-on-cash often were held by institutional owners. Pension funds, insurance companies, the Blackstones of the world and real estate funds that are in and out in 5 or 6 years often need to sell.
You have a sovereign wealth fund that’s in a JV with a local operator and they need to reposition their capital. You have all these situations where high-quality, cashflow-positive, office real estate is being offloaded for non-economic reasons. Often, you don’t have that many buyers in these “sleepier markets” in terms of transactions to come and cleanly, reliably close on these bigger deals. That was like, “We could turn this into a business.”
Back in 2011, this Ragdah Group Of Investors, we got together and created a real estate co-investment group. Essentially, we’re a group of families that get together and buy these large undervalued office portfolios and treat them as landlords. We’re not buying and flipping, holding for three years and selling or riding momentum. We are just buying, holding and focusing on the long-term on cash-on-cash refinancing, have buildings by buildings and compounding that way.
Since that time, since we set up Group RMC in 2011, we’ve grown to a portfolio of 21 million square feet, 210 buildings across 14 US states. Everywhere up from the upper Great Lakes region, Minneapolis, Milwaukee and suburban Chicago, where we’re one of the largest office landlords, down through the Midwest, a lot of stuff in Indiana, Ohio, Louisville and down through Memphis and Tulsa we’ve got stuff in. We bought something in Houston during the pandemic and down through Jacksonville, the flyover states.
If those are overlooked markets, thank goodness, because the economies are incredible, thriving and diversified and you have just not that many buyers for these big opportunities. We’re able to get good pricing. How I joined the business? This was started by my brother and my late father. We got to the point about 2017, the buildings were always a thing in our family. My dad had little framed pictures of these ugly buildings in Quebec sitting around the house. We were proud of them. I didn’t think I was going to join the business. I studied Sociology. I went to grad school and Oxford. I thought I was going to be a professor.
Life took me in a different direction. I worked in local politics for a little while in Montreal. We got to the point where the business was getting much bigger and our basic investors around the world were getting much better. We had to have a way of communicating with them, setting up an investor relations department and getting the reporting much tighter. There was a whole process of several years of putting those systems in place. I joined to take part in that.
[bctt tweet=”The business was getting much more prominent, so we had to communicate with buyers, set up an investor relations department, and get the reporting much tighter, and the whole process of several years of putting those systems in place.” via=”no”]
My brother runs the business. He’s very involved with the vision of the business and the structuring of the acquisitions. I’m much a lot on the relationship side of the business. We have a team of 45 people across 4 offices in New York, Montreal, Chicago and 2 offices in Florida that we opened and a team in Columbus that oversees. The management and leasing of the whole portfolio. We built something very special. That’s how I found myself here.
I like that the family business is still going with you and your brother. I met a bunch of the team and I was impressed. Most of us start in multifamily. Probably, very few of us are in the office except for some of us who did have the opportunity to invest with you but it’s a new asset class for us. With the pandemic, it’s a scary asset class but you talked me off the ledge there.
I’d like to start with, can you talk to me about why now is a good time? It’s a distressed asset just because of maybe perception and people aren’t working in offices as much and the perception might be, “No one’s ever coming back. Why am I going to buy into a building in Downtown Columbus, Ohio or Downtown Milwaukee or the suburbs of Chicago when people are going to be sitting in their homes working?”
We were drawn to office, first and foremost, because we’re value investors. Over the years, we’ve developed a deep knowledge and specialization about how to do this asset class well. It’s a capital-intensive asset class. It can be scary. You can fall flat on your face if you’re not well capitalized and you go in over-levered or take too many risks. My dad used to say, “We’re cowards. Let somebody else be the hero.”
As long as we’ve been in business, you always want to invest almost defensively. We are multitenant landlords. We don’t have any singles and empties. You always want to own a lot of real estates and collect rent from a lot of tenants. You never want to have too much tendency concentration in any one building where that can make the whole project fall apart if that one linchpin falls out.
There are all kinds of ways that you want to minimize risk. You want to capitalize on the deals with a ton of upfront reserves. We have across our portfolio about $200 million of cash equivalents at the partnership level. You always want to be able to handle whatever comes your way. Obviously, basis. we’ve targeted acquisitions with huge cash-on-cash returns. That’s the return that we focus on and 7% to 10% cap rates, which as real estate investors will know is the unlevered yield. Being able to find those small niches in real estate where you’re able to buy deep value and also to steep discount to replacement.
One of the reasons why we like these Midwestern markets that we’re in is that you have a situation where rents haven’t gone up in the last many years the same way that they have in multifamily or other asset classes. To us, that’s a good thing because if you’re buying it on a low basis, you’re in a market where new supply is constrained. You’ll have some built suits here and there but you don’t have a horizon full of cranes. Once the cranes arrive, it’s not a market you want to be buying in anymore. Hopefully, you already own stuff there. Those are all of the ways that we favor long-term fixed-rate debt. We have an LTV or Loan-To-Value ratio of 50% to 55%, which is quite conservative when you take into account all of those reserves.
All of the ways that you don’t go in and be a cowboy. You build your house solid and have money put away for a rainy day. That’s the sensible cautious way to do things. It’s the way that we believe philosophically we need to be good stewards of people’s hard-earned capital. With all that said, we had almost 20 million square feet of office real estate and then this pandemic hit. We’re like, “We believe in our investment philosophy. We’ve stuck to our principles. We’ve been disciplined. We’ve never done a bad deal. We’ve never bent on the rules that we set for ourselves. Hold on tight. That’s all well and good but let’s see.”
As the next couple of years plays out, we were surprised to see that 20 million square feet give you a good data point. We’ve drawn some interesting conclusions based on what’s happened in the last few years. The first is rent collections remain steady. This was surprising. All you heard was about distressed owners and failing tenants. Rent collections stayed steady at 99% throughout the pandemic. That was a pleasant surprise number one. The second thing is that overall occupancy across our portfolio is about the same as it was pre-pandemic. It was slightly higher.
We’re trying to separate the noise from the signal here and what people are saying. The real lesson that we’ve taken from the pandemic very seriously is that there is a flight to quality. Employers want to bring their employees back into the office and tenants have to fight for the business of those employers who are making decisions. HR departments hold more power than they probably ever have in turn of the return to the office policies.
That’s one lesson that we’ve taken seriously from all of this. There will be winners and losers from this pandemic. What we’re seeing is the A minus stuff with the conference rooms, nice lobbies, coffee and the entranceway, fitness centers, newly renovated white light and bright common areas. All of this stuff has a market impact on leasing activity, which is the oxygen of your portfolio. Also having stellar, engaged and competent management and leasing teams. As an aside, we don’t self-manage and self-lease.
We work with all the large third-party providers or very large corporate contracts with CBRE and Cushman & Wakefield. Whoever is the star team in any market, that’s whom we want to be working with because we know that leasing is what brings oxygen to your portfolio. Good management is what keeps them there. We take all of these things very seriously. We didn’t have any fires to put out through the pandemic and we were well capitalized to invest in our spaces as needed. On top of that, what you had was a crisis. Nobody wanted office. That was a terrible thing to waste.
We acquired about $500 million worth of office real estate through the pandemic. We’ve seen the last of the COVID deals but we had some of the most incredible pricing for high-quality assets in Houston, Jacksonville and Downtown Columbus, Ohio. Those are the markets where we never thought we would be able to enter but you had these distressed sellers often cross-levered and over-levered or that had to reposition capital and they were on their 2nd or 3rd extension and you had these situations where they had to sell and nobody was there to buy. When you’re doing things right and structuring your investments conservatively, you can grow even in a shrinking market. You can always do that.
You’re only owning a few percent of the office stock in any given market. If you can offer a high-quality product at a lower price than your competitor, the business is there. That’s how we’ve always wanted to position and continue to position ourselves. Another trend that we noticed right through the heart of COVID was leasing activity changed. What I mean by that is that a commercial lease. It comes due when it comes due and it doesn’t care what’s going on out there in the world.
As leases were coming due right in the heart of COVID, we were seeing the tenants kicking the can down the road. They weren’t renewing for ten years. They were renewing for eighteen months. Horizon was still very fuzzy and murky. Decision makers didn’t want to make any long-term decisions. They were renewing for the short-term, which is short-term in terms of NOI are cheap deals. You don’t have to put much in terms of tending improvements or no leasing costs associated with it.
In the short-term, that’s not the direction you want your business to go. That was happening through the heart of COVID. What we saw in those longer-term, bigger leases, 10 or 20 square foot and 6, 8 or 10-year leases started to happen again. You had to fight for them. Landlords have to have to not take their tenants for granted and offer them the kinds of amenities that are going to help employers bring their employees back to work.
It’s clear when we speak to tenants, the employers want their employees back. They want their people in the office. They want to train their young employees and have a company culture and a sense of community. They know that things are more productive when everybody’s working together in the same place. We found that smaller, local, businesses have been amongst the first to bring their people back because they can’t absorb and hit productivity the same way one of these giant banks might. The larger the institution we found sometimes the little slower to bring people back because the decision goes all the way to the top at headquarters in London or New York.
In local businesses, they’ve been back at work for a long time. There are certain markets like Florida and Texas where things never budge. People never left. There’s not a simple story and many back-to-the-office plans as there are employers. Across our portfolio, that’s about over 2,000. You want to be well-positioned to be on the winning end of whatever changes come. We’ve never been crystal ball investors. We don’t know what the future holds. You want to control what you can control and focus on that. Focus on the value of buying $1 for less than $1, investing in your space, making sure that you’re well positioned to attract those tenants when they do come back and making sure you do what you can to keep them there.
That’s been what we’ve seen. It’s not a crystal ball prediction but as far as migration goes, it seems likely that the Midwest is going to be on the winning end of those trends. If an employer realized that they don’t have to rent to 6 or 7 floors in Manhattan or LA, the most expensive real estate markets in the world, then you’ve got a very competent engineer, programmer or whatever kind of professional you’re looking for coming out of these incredible universities in the Midwest.
If it costs you a fraction in rent and they can work from anywhere, this might prove to be advantageous for the kinds of secondary markets we’re in. We’re already seeing it. The people in your community from Ohio all heard how Intel is investing $20 billion in the largest chip manufacturing plant in the world right outside of Columbus. We’re one of the largest office landlords in Dublin, Ohio. We didn’t predict that, reshoring of manufacturing that the administration is putting in place. A general bringing it back on shore, bringing production back on shore, bringing all the ecosystems that come along with that back to the American heartland. We didn’t predict that.
If there are tailwinds that are going to hit our business coming from all of this, that’s great. We know no matter what happens when you buy $1 for less than $1 and you have a low basis, you can bring down rents if you need to attract tenants. You can pay the leasing commissions, invest in your space and redo the lobby and the elevator that the last landlord ran out of breath and didn’t have a buck to put in so they sold it. You’re in a position of strength.
There’s no single story about what’s happening in office real estate but in this kind of office real estate when structured right, you’re focused on the long-term and you don’t have a 2 or 3-year horizon, you’re thinking about it as a landlord, it’s a very attractive space and we continue to invest heavily in it as a family and our co-investors. We work with families from around the world. You’ve got people in every continent, every corner of the world who want a piece of what’s in your backyard in Columbus, Indianapolis, Memphis and these places. It’s pretty funny. It’s a treasure.
You mentioned Dublin, Ohio. That’s where I happen to live and think that people from all over the world are investing in Dublin, Ohio.
They came on the same trip that they flew from very far away to check out this mysterious place and that is Columbus. Came away with it extremely impressed and shattering a lot of stereotypes they might have had about these flyover states.
I thought you explained this great. I’d like you to explain this to the listers as well. You constantly talk about buying low basis and getting $1 for less than $1. The way that the office operates was very intriguing to me because you said a lot of these buyers when they first buy these deals have a 7 or 5-year term. When it gets to the end of that, they have no options. They have to sell. It might be that they’re selling at a great time or a horrible time but there are no choices. It’s hard to extend. Can you talk about how you capitalize on that? That’s part of the reason you’re able to get these deals because these institutional buyers have these mandates that they have to move on and sell even if they’re going to lose money.
That presents a huge opportunity from an investor’s point of view. We’ve been in business for many years doing justice in these markets. We’ve developed a reputation. My dad used to say, “You want to show up and be the nice Canadians. We’ll be a pleasure to deal with. We will close at favorable terms on time. When we go hard with a deposit, we always come up with the money. When somebody shakes our hand, they don’t have to count their fingers afterward.” There’s a sense that we are a reliable transaction partner. That is incredibly valuable for these sellers from the institutional world who are on a tight timeline or late to get rid of some of these things.
They’re willing to take a haircut on price in exchange for a certainty of clothes, which is something that we pride ourselves in providing. We don’t retrade which means changing the terms and the pricing at the very last minute because that’s going to come out of the poor selling brokers’ commission. Is he going to want to work with us down the road if we make his life difficult at the last minute? No. You transact in an honorable way. You stick to your word, do what you say and finish what you start. You have that reputation. That also helps us source deals. We are sometimes made aware of upcoming transactions. We have great relationships in this world.
It’s a big world that encompasses the whole Midwest and Southeast far but it’s still a small world. People know each other. People have reputations. Our Head of Acquisitions, Park Montross is based in Chicago. He’s constantly on the road checking out deals, speaking with brokers, chatting with people, seeing what’s up and touring the portfolio as well but looking out for these opportunities. This was especially true through COVID. We acquired some incredible deals. We acquired an 11% cap from a suburban portfolio in Chicago being sold by a large financial institution on one of their funds through COVID.
They had to liquidate assets. Who was buying at that time right in the heart of COVID? We had a successful first transaction with them. A few months later, because of that successful transaction, we were able to acquire a beautiful A-class property 5718 Westheimer in the Galleria sub-District of Houston, which never in one million years did we think we would own something in Houston. That window is closed up. Those COVID fuels are behind us but it’s still possible to participate in them through our evergreen fund.
In answer to your question, a reputation as a reliable, transaction partner on these kinds of deals when institutional sellers are in a position where they are on a time crunch to offload some assets for their reasons. We’re not smarter than them. They just have a different set of incentives in a different context they’re working. That’s provided an opportunity for us and our investors that we continue to take advantage of as long as the get is good.
I want to back up a little bit and go back to the topic of COVID. It took a lot of convincing for me to understand people are going back to the office. I talk to my friends and they’re all sitting at home still. A few things I want to understand. I understand that you have high occupancy. It means that the buildings are leased out. Can you talk about the occupancy from how many people are coming into those fully leased-out offices? Are you at 50% or 60%? We talked about it depending on the market but talk about that. What are companies doing to get people back to the office?
You talked about amenities. What new amenities are you putting in and what changes are you making? In some of the buildings we toured, you talked about, “We’re getting rid of cubicles, putting open spaces in more offices and different regions are doing different things.” That’s 7 questions wrapped in 1. If you can talk in general about how you’re getting people back to the office, what they’re doing, the amenities and all the things to drive occupancy of people in the building.
It depends on the market in terms of who is physically going to the office. What we’re seeing is that usage is very high but people aren’t coming in every day. Sometimes you’ll have a parking lot that’s however percentage full but everybody has come in at least once that week. It’s a little bit hard to keep track of. Flexible working days, hours and schedule look like it’s become a norm. I remember my dad saying at the beginning of this, “You can’t rent your space Monday, Wednesday or Friday.” There’s something to that.
It’s not clear how that will impact the footprint. We’re not seeing a huge contraction of tenants’ footprints and we are seeing increased leasing activity. That’s a signal to us of how employers are thinking about their space needs long-term. A lot of them are still not sure yet. “The economy is doing well. Employers’ businesses are growing.” This is what we’re hearing from our tenants. What they don’t know yet is how much space they’re going to need. What we’ve found is that a lot of tenants from one day to the next, they’re like, “I need space.” They’ve been at home this whole time. To answer that need, we’ve developed a program of developing speculative spaces that are fitted out usually with furniture, often flexible furniture.
The walls are painted. The floors are done. That has two advantages. The first is that from a landlord’s perspective, it allows us to control costs. In an environment where their supply chain crunches, where construction costs are very high, this allows us to get upstream of that and control how much money is invested in the space. What it also allows is when tenants reenter the rental market and decide they need space, often employers are doing this last-minute decision, “I need space.” There aren’t very many landlords kidding out space before the space is rented. You become automatically a finalist in the running for those things. Often, they take it as is.
That’s one of the things we’re finding that often the decision to come back to the office is like a snap decision almost. We’re trying to accommodate that. The other major trend I can overestimate is how much amenities is a key importance in terms of our leasing and approach to being landlords in this environment and in terms of bringing people back to the office. There are a couple of case studies that we put into place. Right before COVID, March 2020, we tour it together. PNC Center is right in Downtown Cincinnati.
You’ve got a great building and bones. We bought it at over an 8% cap at 79% occupied right before COVID. You had PNC Bank, a nice anchor tenant there. As an aside, PNC Bank took up 20% of the rentable space in that building, which from our perspective as landlords, is too much tenancy concentration. We combined this acquisition with a suburban Detroit portfolio of twelve buildings that was already stabilized in spitting out cash like a workhorse through this whole period. It hasn’t a badge. You combine them and mitigate the risk to give some context on the acquisition process of that building.
We had PNC Center. When you walked into the lobby, you had PNC Bank renting some space in the back. It didn’t look that nice. The lobby was a little tired. It looked like you were walking into 1997. It needed a refresh. We knew this right going in. We had the plan to make massive major capital expenditures on the property for it to catch up to its competitive set.
With our low basis, we’d be able to attract tenants. This was the plan that we were going to put into place. As soon as COVID hit, it happened to coincide with when we were going to start investing money into this place. We put over $ 3 million to redo the lobby. You saw it. It feels like you’re walking into a boutique hotel. It has beautiful conference rooms with state-of-the-art projectors. You have a concierge at the front, a coffee area, a lot of workspaces, shared little meeting spots at the bottom and beautiful plants. There’s a golf simulator and a ping-pong table. I mean, the works. That drew the attention of the local market.
[bctt tweet=”We had a plan to make massive major capital expenditures into the property for it to catch up to its competitive set. And because of our low basis, we’d be able to attract tenants.” via=”no”]
We had a brokers event for locals and leasing brokers. We invited everybody our team from Columbus went up there and greeted everybody. It was like a coming out party because these buildings have reputations, management, leasing and amenities. If it falls behind its competitive set or it has a reputation, “It is not nice. They’re running out of money,” then that gets known. On the inverse side of that, once a new owner comes in and breathes new life into a business, into a property, which I guess is a business that is also known.
In this property since 2020 when we acquired it, occupancy has gone up from 79% to 88%. Leasing activity has been robust. Rents per square foot have increased from $12 to $13 range to $15 or $16, even $17 a square foot net rent. This happened through COVID. The starting line was March 2020. It’s an interesting case study of what happens when you invest in your space. The business and tenants are there. They want the space. They want to bring their people back. They need a space that will justify them bringing people back and where people will want to go to. We signed a huge lease with Johnson & Johnson on that property. They said, “We want a fitness center.”
We’re building out a beautiful fitness center. We’re able to move quickly. We have the funds and the cash. It was all part of the plan. We’re in a position to capitalize on all of these trends. This was an important learning experience for us as landlords. We’re putting in place that same kind of approach of investing robustly in the space to put in place those amenities that are bringing people back and we’re attracting leasing activity.
We’re doing that in Jacksonville and Downtown Columbus 65 East State Street. We’re going to activate the whole lobby area and we’re investing a lot of space inside, putting some spec suites in there. We’re doing that in Milwaukee Chase Tower. We also acquired an incredible COVID deal that’s in the process of being repositioned. There’s already a buzz surrounding that building. That’s one of the important lessons that have come out of all of this.
I couldn’t believe when we went on that tour in one of the lobbies and it was the old-fashioned office lobby. I thought, “This looks fine to me. Who cares? It’s the lobby. I’m just walking through.” You walk into the ones that have been redone. They have a shared space and ping pong table or a room that has a bar and a gaming table or something. There are all kinds of stuff to do and then you realized, “Making the lobby nice is a good thing because it changes it.” I want to switch gears a little bit and talk about how to invest. In the structure of your deals, there’s an evergreen fund. You also have single deals or group deals and no asset management, performance or carried interest fees. Can you talk about the structure and how people invest?
Indeed, we don’t charge any ongoing fees, no management or commitment fees. There’s no carry or J curve. If ever there’s an exit through the sale of any of these properties, there are no fees at the backend. We see this as like, “Let’s the landlords together. Let’s co-invest together.” The way we structure our deals is we’ll get a deal under contract. We’ll put together the financing, structure it, put together the materials and then essentially splice the deal into units. We use a cost-plus pricing system.
We mark up the price of a unit in the deal by 6% of the total acquisition cost. We call that the co-investment premium. We take that inequity, our family and the principles of RMC alongside the capital that we put into every single deal. At least depending on the size of the deal, we have 5% to 12% of the equity in every single deal. We are coming at it from the point of view of a family investor that wants to own a piece of these buildings and hold it in the buildings by buildings. It doesn’t make sense if you have a 5 and 20 fee structure where you’re incentivized at the end of the day to sell, realize your backend fees and redeploy the money afterward. As long-term landlords, it’s not how it works. That fee structure works well for investors too. It’s very transparent.
You see upfront exactly what you’re paying and on a long hold period while it comes out cheaper. I’m happy to talk more about that. To give you a context, there are no ongoing fees whatsoever. When you’re buying it at 8%, 9% or 10% cap, as my dad used to say, “If there’s enough meat on the bone, nobody’s hungry.” All that to say, most of our business since we’ve been in business has been a deal-per-deal business. We put the word out and then investors invest on a deal-per-deal basis, “I like this one. I like Milwaukee. Pass, I have too much in Memphis already.”
In 2019, we started thinking that a lot of our investors didn’t have the capacity or the desire to do deal-by-deal due diligence. They liked the strategy and the group. They had toured the assets with us. They want to make a nice allocation and have that money put to work across our deals. We reversed-engineered an evergreen feeder fund. Essentially, it’s a vehicle that aggregates a large number of investors of families into one LP. That LP automatically invests in every single deal that we do starting in 2019 when we set the vehicle up and going forward for all of our future deals.
Somebody who invests in that vehicle buys units in that vehicle participates in all of those incredible COVID deals, including PNC Center in Cincinnati that I talked about with the ping-pong table, Jacksonville in 65 East and that super cash cow in suburban Detroit. They’re not much to look at but you wouldn’t believe how much. There’s been a lot of leasing activity there. It participates across 10 investments and 71 properties, totaling almost 9 million square feet across 10 states. You’ve got this automatic diversification that you’ll continue going forward. What you’re buying is units in that vehicle.
As transparent as you like, you’ve got a data room, all the information on the underlying deals is in there and it has a right of first offering on every single deal we do because we want to make sure that it participates in every single opportunity. That’s a commitment-based vehicle and then you put the money to work over the next twelve months. It has quarterly closings. It’s the same fee structure because that vehicle invests in the deals. It pays that co-investment premium up front and then it’s a pure co-investor alongside everybody else.
[bctt tweet=”Vehicle invests in the deals, pays that co-investment premium up front, and then it’s a pure co-investor alongside everybody else.” via=”no”]
It invests essentially like the big family offices of this world invest. They do a little bit in every deal or in a dozen of deals rather than having that concentration. I don’t care if you’re the Coke brothers or whoever. If you’re buying an entire $150 million property all to yourself, that’s a kind of risk that we wouldn’t recommend. We like owning a little bit of a lot and that’s how this vehicle invests. Sometimes with smaller investors, they can bunch together to form one bigger investor and that can take some space up in the evergreen vehicle too. That’s the best way to go get access to these deals.
That’s what you did for Left Field Investors. The minimum on this fund is $500,000, which is a little more than most people in our community want to do in one check. You allowed us to invest as individuals as long as we got to that minimum from Left Field. We’re very thankful for that. I’m funding that. That’s exciting. I imagine we might be able to do that again for the readers thinking, “Did I miss out? I don’t have $500,000 in my pocket.”
My hope would be that on the next closings we can try this again because it was successful and it’s a great way to get into office. I want to also talk about something that we skipped over a little bit, the debt or the financing on these properties. We look at everything from a multifamily perspective and we understand that. We’re looking for fixed-rate debt. It’s hard to find. You need caps on the adjustment. Can you talk about how the debt works for the office?
Thank you for your trust and your investors as well. We work with “small” investors. We know that that’s how wealth in a family is built. We are happy to accommodate. We’re very glad that we’re able to partner together on these deals. We take that responsibility very seriously. To answer your question about debt, we like to favor long-term fixed-rate debt. As soon as it’s possible to put that on, if the deal is already stabilized, that’s what we’ll do.
In recent years, some of the deals that we’ve done have been value-add deals where there is work to be done in terms of bringing the occupancy where it needs to be. We got an incredible basis and huge discount to replacement. Often you’re buying from an out-of-breath seller who they were in a downward spiral and occupancy was going. They were losing tenants. You need to rate the ship. In those cases, we’ll often put 2, 3 or 4 bridge loans. Those are often floating rates but we buy interest rate caps to protect the underlying capital and not be subject to the ups and downs of the capital markets.
That’s what we’ve done. We don’t want to over-lever. We often buy from over-lever and cross-lever the landlord. We want to be cautious with debt. We have an adjusted loan-to-value ratio of 50% to 55%. We’ve become more conservative with debt and that LTV since Covid because we know things can get a little crazy. The capital markets are tricky. We’re extra cautious on the acquisition side.
[bctt tweet=”The capital markets have been tricky since COVID.” via=”no”]
We haven’t had a deal under contract since earlier of 2022 and we’ve been on a lot. We know what we’re doing. This isn’t our first rodeo. We sent bids for close to 5 million square feet of office real estate in these markets that we know well. We were outbid. What we were seeing was that it was a lot of new entrance to these markets, people from the industrial and the multifamily world who were seeing their yields being compressed then started sniffing around these acquisitions and outbidding us, which we won’t do a bad deal so we’d rather wait it out.
With interest rates going up, we do think that there are going to be some sort of distressed sales, distressed owners and some blood in the streets deals coming up in the last quarter of 2022 or early 2023. Our deal team is underwriting and keeping an eye on quite a few acquisitions. Always being very cautious with how much debt to place. That’s not my side of the business. We have a whole team that works with a debt broker that works with all the large institutions. They know us. They know how we like to work. I’m happy to put you in touch with the experts on our team who deal with the actual sourcing of the debt and structuring of it but the high level is how we operate.
You intend to hold forever. What’s the cell decision if there is one? You talked about your family exiting through selling to REITs. Is that a possibility in the future? Can you talk about the hold period and what the future may be?
We want to be very upfront that these are not meant to be thought of as liquid investments. They’re quite a liquid, like infrastructure, real bricks and mortar. You’re owning it. We want to go into it with a mentality of an indefinite hold period. We’re not opposed to selling but it has to be dictated by price, first and foremost. It has to be accretive to the partnership. It has to be the right thing to do and for the right reasons. We have 210 buildings across 14 states. It’s unlikely in terms of how an exit would happen that we sell these assets one at a time in a granular way the same way we bought them.
If there is an exit at some point, this is just thinking out loud and I know I’ve talked about this with my brother a little bit, we’re at $2.5 billion AUM. When we will double that? It could become interesting for an institutional investor of some German pension fund, the CDPQ and one of these to look at this nice diversified slice of middle America and be interested in maybe taking a portion of it or something like that. This is not a plan. It’s just what might be more likely in terms of an exit. That would offer underlying LPs the option but not the obligation to exit. That high level is not a promise again but look at the dynamics that seem more likely.
In terms of liquidity for individual investors, we don’t want to hold anybody hostage. Let’s be on the same of the same mind. We’re in this for the long haul and real investing together but life happens in real estate stuff sometimes people need to get out. With this evergreen feeder fund, which is called the Group RMC Master Co-invest LP, we keep 5% of the assets in the funding cash or cash equivalence to facilitate yearly redemption requests. There’s a table after year. If you hold it for only one year, there would be a steeper discount on the fair value of the assets. If you hold it for five years, there’s a little smaller discount. It’s all laid out in the documents.
That’s how it works across the business. We just figure out a secondary, either our family buys somebody out or we know a lot of families in our network who are eager to get in our older deals that they missed out on. That’s usually how it works. On a high macro level, we won’t sell the assets one at a time but who knows? We remember when the industry was the pits. It’s quite hot. If the suburban office in Kansas, Columbus and Cincinnati becomes a trend, we’re here for it but it has to be pricing. That determines exit through a sale.
This asset class is super interesting to me. I was glad to have toured and learned all that I did. This show is cementing it in there. I thank you for that. The last question I always ask is, what’s a great podcast that you like to listen to? It can be business-related or something else that’s interesting.
I’m a big podcast person and this is the first show I’ve ever been on. There’s something a little surreal full circle about all of this. Thanks for the opportunity. The first one is called Ones & Tooze. It’s this economist called Adam Tooze, a very proper British guy who’s an Economics professor and also a historian. He’ll help you understand the economics and macro-economics news and foreign policy stuff with an economics perspective. It has an encyclopedic knowledge of the world. He’ll go on deep dives. I love a good deep dive. He does it entertainingly. He’s a contributor to foreign policy. The other one is fun. It’s called the Wind of Change. Do you remember that song from like 1990 by the Scorpions?
You’ve stepped into my world because the Scorpions were my favorite band of all time. I listened to that podcast. I flew to Vegas to see the Scorpions in concert. I’m all about the Wind of Change. It’s phenomenal.
Do know about this podcast?
I’ve listened to it and I loved it. It’s a phenomenal podcast. You don’t have to be a Scorpions fan to like it.
I didn’t even know the song. It’s this journalist called Patrick Radden Keefe who’s written a bunch of great books. I’m listening to one audiobook. He explores a rumor that this song by the Scorpions that came out in 1990 when the Berlin Wall was coming down was not written by the Scorpions but written by the CIA. It was like a sci-offs. It’s eight episodes long. The more you listen, the more you’re like, “This might be true.” It is a fascinating journey and entertaining. It takes you into that moment in time at the end of the Cold War. I remember it through a child’s eyes. I was a kid then. To go back and listen to all these interesting characters and these CIA people, I love that stuff.
The only thing I didn’t like about it was they did not play enough scorpions to music in the podcast. The podcast is great. I’m happy you mentioned it. That’s awesome. I’m the biggest Scorpion fan on Earth but they are in the ‘70s. Their concert was a little bit different than the one I went to in 1985. I still love the Scorpions and I love that you brought that up. The actual last question I ask is if people want to get in touch with you to learn more about Group RMC, what’s the best way to do that?
Get in touch with you. You know how to contact us or my email, Evelyne@GroupRMCUsa.com.
This has been fascinating. I appreciate the partnership that we have with Group RMC and Left Field Investors. The two where I went on were phenomenal. I thank you for being on the show. This will be a great episode and a lot of good stuff in here to learn about a new asset class. Thank you very much for being on the show.
Thank you very much. We appreciate your business. I appreciate your time and the invitation to come to join you. This has been fun. Take good care.
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That was an interesting episode with Evelyne. I did the property tours and saw a lot of those properties and that’s what changed my mind about office similar to retail and hospitality. Those are three asset classes that I was not interested in mostly because of the pandemic. Since then, I’ve toured hospitality with accountable equity. I’ve toured an office with Group RMC. I’ve seen that these are asset classes that it is the time to buy when everyone’s running the other way. That’s where you get the deals. Multifamily cap rates have become compressed that it’s hard to find deals there but there might be some in some of these other asset classes. I was pleased to have Evelyne on to talk about that.
A family company and value investors are the kind of people that I want to do business with. I thought it was interesting how she talked about, “Once the cranes arrive in the town, that’s when you want to already be an owner. You don’t want to be buying properties that need renovations and things when new properties are going up because people will flock to the new properties.” That was an interesting thing. Once you see a bunch of cranes, you want to already be there or skip that town and go to the next one.
It is fascinating to me that rent collection during the pandemic was 99%. No one was going to the office but rent collection was still 99% because these are corporate tenants. They are still paying the rent and are still in business. They have to pay the rent. It’s not like a homeowner or something like that. That was surprising. The question is, “Will people keep renewing leases and keep the rent collections that high?”
As Evelyne said, “People are renewing leases. There are some changes to terms, maybe in length and they’re adding some amenities.” The other interesting thing is to get people back into the office. Employers are requiring these big office buildings to be put in shared working spaces. Instead of everyone having their cubicle or office, you might only go into the office 1, 2 or 3 times a week so there’s going to be more floating workspaces where you go. You may work in an office one day and then in the middle in the open area another day and there are couches. We toured some of these properties and they looked comfortable and cozy.
If you need quiet time to meet with somebody or on your own, you can go into one of these offices. If you were collaborating, you can sit at the table. There are couches and TVs. It’s a more relaxed workspace. That is what they’re using to entice people back into the office. This is an asset class I put zero thought into until we were connected with these guys through the Family Office Club. We’re thankful for that connection.
I went on the property tour and was blown away by the professionalism of all of the people that I met. Getting an understanding of the office asset class helps me understand that there is a place for this in my portfolio. That spurred me to look at other downtrodden asset classes. I mentioned hospitality and retail, being two of those. I’m looking at all of those and branching out, trying not to chase the shiny object but learning about new asset classes. When I find one that makes sense to me, I’m going to go ahead and invest. It’s a great episode. I’m thankful for the relationship we have with Group RMC and Evelyne. That is all for this time. We’ll see you next time in the left field.
Important Links
- Group RMC
- Group RMC Master Co-invest LP
- Ones & Tooze
- Wind Of Change
- Evelyne@GroupRMCUsa.com
- Family Office Club
About Evelyne Massa
Evelyne is VP of Private Investments and a member of the founding family at Group RMC, a private partnership investment group with a focus on acquiring and holding large, income-producing, undervalued office portfolios in non-Gateway markets across the Midwest and Southeast. Evelyne plays an active role in operations and developing relationships with partners across North America and Europe. She lives in Montreal and holds degrees from McGill and the University of Cambridge.
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