How to price the entry queue risk on an open end core plus multifamily fund

Consider a twelve year, $2M allocation with two ways in. Option one is an open end core plus multifamily fund: 0.85 percent on NAV, no promote below a threshold rarely triggered, current entry queue quoted at two to three quarters. Redemption queue history through 2023 and 2024 stretched to four quarters at one point, and funds that are candid about that history are worth more credit for it. Option two is a closed end value add vehicle, 1.5 and 20 over an 8, seven year term with two one year extensions. The problem with option one is the NAV. It's appraisal based, and appraisals lag transactions. If the sector really is 20 to 30 percent under the 2022 peak and near a bottom, the marks may have caught up by now. But a careful read of quarterly reporting usually shows individual assets moving in steps, some a year after comparable trades. So an investor entering today may be paying current NAV for a portfolio still carrying two or three assets above where they'd clear. The sizing question is what actually matters. A 4 percent stale mark on a quarter of the portfolio is roughly 1 percent of entry price, noise against a twelve year hold. A 15 percent stale mark on half the portfolio is a different conversation entirely. The decision comes down to submitting for the queue this quarter versus waiting two more quarters of marks to see whether they keep drifting down. If the drift has stopped, that's the signal to move. Waiting and having the marks turn up instead means paying for the information.

3 replies

raj_mehta14 PF4BPRO 10

The two to three quarter entry queue is doing something that shouldn't be overlooked. The purchase isn't at today's NAV, it's at the NAV whenever the money actually goes in. So the wait-two-quarters plan and the submit-now plan may land at nearly the same mark anyway. Ask precisely which valuation date the subscription prices at, because that's the whole question and it's usually one line in the offering document.

raj_mehta14 PF4BPRO 10

omar_haddadPassivePRO

Different angle. Ask what the portfolio's average capital expenditure per unit has been the last three years and what the roofs and mechanicals look like. Core-plus funds carry a lot of 1990s and 2000s vintage stock and deferred work shows up in the NAV very slowly, if at all, until it shows up all at once as a capital plan. That's a mark problem too, it just isn't the one you were looking for.

omar_haddadPassivePRO

devon_pierce SS4APRO 15

@raj_mehta14's point kills the timing plan and it should be taken seriously. On sizing the stale mark, pull the last eight quarters of realized dispositions against the carrying value at the quarter before sale. If they sold at or above the last mark consistently, the appraisal process is conservative and that concern can be set aside. If they sold 6 or 8 percent under, that is the number to apply to whatever share of the portfolio hasn't been re-appraised recently. A fund should be able to provide that. If they won't, that's information as well.

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devon_pierce SS4APRO 15

How to price the entry queue risk on an open end core plus multifamily fund

3 replies