Run, Don’t Walk, if You Can Match These Criteria: Q&A with Eric Silverman, Eastham Capital
- Feb 19, 2015
Eastham Capital announced at the end of last year the completion of its $100 million fourth fund. The company’s largest fund, Eastham Capital Fund IV LP invests in distressed multifamily properties nationwide. The firm now has almost $200 million in capital under management. MHN catches up with Eric Silverman, the company’s co-founder and managing partner, to obtain an update regarding the progress of the fund, and the company’s investment criteria and goals.
MHN: Tell us about your portfolio.
Silverman: We joint venture with owner-operators that manage properties, and we seek properties all over the country. Currently across all the funds we have a properties in 11 states, and we are looking for more. We have invested with seven separate operators. In the history of our business across eight years through Funds I,II,III and IV, we have bought approximately 50 properties totaling about 14,000 units and sold 15 properties with some 5,000 units. Through Fund IV alone, we expect to buy a total of about 30 properties over the next three years. We have already bought four properties.
MHN: What are the parameters for the properties you are seeking, in terms of age and size?
Silverman: We are typically buying suburban garden style properties that are 100 to 500 units in size‑on average about 250 units. Typically, the properties were built in the 1970s to 1990s We like to say that we buy the properties broken sell them fixed. We buy properties [that have] some sort of management, physical, financial managerial problems. We renovate and fix them over one to three years. Once they are stabilized, we hold them for cash flow until it is time to sell them. The timing to sell [the assets] relates to market timing. For example, now is a good time to sell: Demand for apartments is high; interest rates are low.
MHN: Do you have limits on how much you invest?
Silverman: We are majority owners of the properties that we buy. Our equity check in each property is $1 million to $5 million or more for a majority ownership stake in the property.
MHN: For this Fund IV, in which markets have you made acquisitions so far?
Silverman: So far we have bought in Texas and Illinois, and we really are looking all over [the country]. I can tell you that historically, most of our properties are located in the middle of the country as north as Minnesota and as South as Mississippi. Our number one market has been Texas, our number two market is Indiana. But we are really open to investing in all markets.
We say we only buy properties if we can get to generate a 10 percent cash flow after we fix them. So post-renovation, we are looking for stabilized cash flow at or above 10 percent on a levered basis.
MHN: Why do you target that level of cash flow?
Silverman: It’s a great question. We target that level of cash flow for one very important reason—margin of safety. As a company we really look for cash flow to give us a margin of safety if things don’t go well. The way I look at cash flow is that it is a way to reduce our risk. Risk is all about getting your money back. I’ll give you a simple method. If I hold the property for five years, at 10 percent cash flow, after five years I have half my money back. That is reducing my risk. Risk reduction is the big driver. Now, everyone loves cash flow. Who does not like getting a check, right? But I really look at it more importantly as risk reduction.
MHN: What do your partners get out of the deals?
Silverman: First off, they are equity partners, so our partners are typically putting in 15 to 20 percent of the equity so that they are aligned with us on the investment. They charge reasonable management fees, and they get performance bonuses. The better the property performs, they get a cut.
MHN: You said you are “small on purpose.”
Silverman: I would argue that the majority of suburban style garden apartments are in that $5 million to $25 million category. That is the deal size that we target. We think it is a big part of the market where there is actually less competition. Even in the private equity world, there is less competition. If you take all the private equity players out there, most of them are looking to write larger equity checks. I would argue that there are a lot more deals in the smaller-than-$25 million [deal size] category, and if you cut the equity providers into more-than-$5 million and less-than $5-million, there are a lot more equity providers that are in the more-than-$5 million category. So strategically, that is why I say we are doing smaller deals on purpose.
MHN: If you had to summarize, what would you say are your most important strategies for success?
Silverman: Number one, be patient, picky and carry a cash flow. Number two, we think that apartment management is not a commodity. We want to partner with the best managers and operators. But we also want to partner with the best managers and operators where they are investors with us in the deals—where they have skin in the game.
Our five rules are:
One, we work with operators that are local to the market and that are in the market already. I am not in the market. I need locals. All real estate is local. I am not going to sit in Boston and tell you what is going on in Texas or Indiana.
Two, [our joint venture partners] are great managers. They self manage, and they are in the management business. I am an equity guy—I am not in the management business. I need great managers. [Management expertise] is something I do not have.
Three, skin in the game. We typically look for investors to put at least 15 to 20 percent of the equity with our equity. That aligns us. Now we are investing together.
Four, we fix properties, not neighborhoods. This point is really important. The reason why I say “no” so often is that even though we are seeing distressed deals, there are distressed deals in markets in neighborhoods that I really do not want to be investing in. The properties do not have to be in fancy neighborhoods, but I want to be investing in stable neighborhoods. I like growing neighborhoods, but I just do not want to invest in declining neighborhoods. I am not a developer. I am not saying “we will build it, and they will come.”
Five, we will only do deals where we believe we can obtain a 10 percent or greater cash flow after we fix it, post-renovation.
If people read your article, and they have deals that fit those five rules, they should run, not walk, and call me!