Multi-family real estate gives Dome liquid returns
Dome Equities is a USD1.27 billion US real estate firm. CIO Eric Jones explains that the firm launched 16 years ago in the same Manhattan building they still inhabit and has always focused on US real estate.
“The business model was started across the street when I was at Citibank Private Bank,” Jones says. “The genesis of the business came from a study that showed that 25 per cent of the assets at the largest non-Swiss private bank were in real estate. At that time Citibank wasn’t capturing that, so it was the catalyst for us launching and subsequently Citibank introduced investors to us.”
Dome invests in multi-family real estate, largely apartments which are rented out. Its average holding period is three years. The liquidity issue, always an issue with property, is addressed through cash flow.
“Liquidity is neither good nor bad, just expensive or cheap,” Jones says. “We believe the high cash flow from rentals paid out quarterly mitigates the liquidity risk. The rental business is high margin but with our relative holding periods, we think of it with a value added perspective. We buy it, we fix it and we sell it. We get an improvement with strategic capital and then liquidate to the buyer who wants to own real estate longer term.”
“We have a heavy cash flow emphasis so we don’t really worry about the cyclicality that people talk about, if only because we stick to a very disciplined investment process that has proved successful across a range of economic outcomes. We are agnostic to the condition of the economy because people have to live somewhere.”
The somewhere that Dome focuses on is widespread across the metropolitan areas in the US. “There are 380 metropolitan areas and we focus on the largest 100 and that portfolio is only in 19 of those metros and then 40 per cent is in four metros – Denver, Dallas, Houston and Orlando – and the rest spread across the 15 others,” Jones explains.
“We have prided ourselves on our long term disciplined market selection process so those 100 metros we risk rank to figure out where the growth is occurring and then we target our acquisitions. What we are following is demographic growth.”
The prime US renter is 20-34 with a job that pays well. By the end of that age bracket or in the latter half, they begin to get married and/or have children and are moving out of rentals. However the demographic is changing as Millennials, the children of the baby boomers, are expanding by 500,000 over the next six years and demonstrably getting married and having their first child at the oldest age on record. Jones thinks that the fund has broad appeal. Investors are currently dominated by ultra high net worths plus there has been a move to recruit smaller pension funds, endowments and foundations.
“We think we have a yield orientated investment product in a world where there is no yield which is non-correlated to public markets, and at our strategy level, so much of it is demographic driven, we can have a lot of success regardless of the environment,” Jones says.
“If rates rise, we will see tumultuous market activity and a non-correlated yield strategy provides a safety buffer. And if rates are rising, it must mean there is economic growth and that economic growth must mean employment growth which should parlay into good rental growth rates for apartments.”