The company recently closed on its first transaction, when it formed a joint venture with MacFarlane Costa Housing Partners to acquire Simpson Housing Solutions, an owner and developer of affordable housing, from parent company Simpson Housing LLLP. The deal involves 26,000 affordable rental units in 273 properties in 33 states, the District of Columbia and Puerto Rico. Avanath will hold the assets under a subsidiary, Avanath Affordable Capital. Its JV partner in the deal is a partnership of Michael Costa, president of SHS, and MacFarlane Partners Affordable Housing, an affiliate of MacFarlane Partners in San Francisco.

The first phase of the deal gives the joint venture ownership of the portfolio. In Phase II, expected to close later this year purchase SHS' general partnership interests in the investment funds or partnerships that own the communities, and gain about 30 SHS staff members. The deal would make Avanath one of the largest owners and managers of affordable housing in the country.

MCHP, to be based in Long Beach, CA and led by Costa, will retain SHS' development, finance and corporate accounting functions and continue to develop affordable housing, as well as the other SHS employees. The firm's focus will be on communities in California, Arizona, Nevada, New Mexico and Colorado, with an average 1,000 to 1,500 units per year, primarily through the use of LIHTCs. It currently has eight properties under way, all in California.

To help pay for the acquisition, Avanath is conducting a fund offering for which Presidio Partners is serving as the placement agent. The GP interests of SHS will be the first assets held by the fund and will serve as the initial platform for the firm's affordable housing efforts.

Recently, Carter spoke with GlobeSt.com about the new company, the SHS acquisition and his views on the market. GlobeSt.com:You've had quite a bit of success over the past several years. Why did you decide to form Avanath Capital?

Carter: In the early 1990s, I co-founded Capri Capital with my high school classmate, Quintin Primo, with the vision of building a diversified real estate investment firm. With initial seed capital of $100,000, we built Capri into a leading player in the pension fund investment and commercial mortgage finance sector, with some $7.4 billion in assets under management. In 2004, we sold our mortgage finance platform to Centerline Capital. In 2006, I sold my interest in our pension fund investment business to my partner. From 2004 to 2007, I was a senior executive at Centerline Capital.

There were many lessons learned in starting a company, building and growing it and realizing value through a sale. In starting Avanath, I wanted to apply many of the lessons learned from building Capri, with an emphasis on building scale quickly to maximize economies of scale and market penetration, building a best-in-class management team and focusing on underserved markets where there are inefficiencies in capital availabilityIt's an extraordinary opportunity to have the ability to do another start-up, but this time having greater expertise and access to capital.

GlobeSt.com:It's a tough market in which to do business. What's your strategy? Why did you choose to focus on those three specific sectors?

Carter: At Capri, there was considerable disruption in the market. What I learned in that go-around is that's always a great opportunity to build a new enterprise when there are significant disruptions, particularly among some of the larger incumbents in that space. It's the best time for a new player to make an entrance into a particular market. That's what we successfully did in the early 1990s, in both entering the pension fund investment space as well as the GSE lending world. I think the current market is certainly analogous to that time.

So our strategy is focus on opportunities created by market disruptions, in segments that have significant underlying demand. For example, we are bullish on the affordable housing sector because the demise of the for-sale housing market has increased the demand for rental housing and, more specifically affordable rental housing. We chose to focus on affordable, urban housing and commercial mortgage for three reasons. One, the Avanath management team has a track record in those areas. Second, there is significant underlying demand for the product in these sectors. These are also sectors that have been historically underserved by institutional capital.

GlobeSt.com:What are your investment criteria in terms of hold period and yield expectations?

Carter: We are a long-term investor with an investment horizon of seven to 10 years. Our return expectations are in the mid-teens, using a very conservative level of leverage.

GlobeSt.com:What types of investors are you targeting for your funds? And how much equity do you intend to raise?

Carter: Pension funds and other institutional investors. We just started raising capital, but the final figure is something we're still trying to finalize.

GlobeSt.com:Tell me a bit about the Simpson Housing acquisition--how did it come about, and how long was it in the works?

Carter: It was the culmination of a series of longstanding relationships. Capri Capital was a lender to SHS, and I formed a relationship with Michael Costa. Separately, Victor MacFarlane [managing principal, chairman and CEO of MacFarlane Partners] has been one of my closest friends for about 20 years.

Originally, Michael Costa had worked out an opportunity to purchase a company from the parent company and had originally brought Victor in as well as Greg Filkin, president of MacFarlane, also a close friend and Greg's and Michael. This transaction started out with Michael having an opportunity to purchase a company and bringing in both MacFarlane Capital Partners and Avanath Capital Partners to participate in the acquisition.

GlobeSt.com:Why did you choose to break it up the way you did? What's the split of the JV?

Carter: Currently, we have minority interest in the venture. Upon the second phase, we will own 100% of the piece we are targeting to own. In terms of strategy, Avanath wanted to own and operate the existing portfolio and the asset management business of Simpson, and MacFarlane and Michael wanted to pursue new developments in the affordable business, so there was a natural synergy that we had in order to pursue this transaction collectively. The two companies will maintain an affiliation and we may in fact continue to do some of their asset management.

If you look at a lot of the tax credit business model, a lot of companies separate their ownership and development functions. Centerline, for instance, is separate from the Related Co.

GlobeSt.com:These are Avanath's first assets. What are your plans for them?

Carter: We're committed to this portfolio. We looked at it and evaluated in the basis of maintaining it as affordable housing. I know there were a lot of people who looked at this space for properties to convert to market rate at the end of the compliance period. There have certainly been some opportunities to do that, but this is by and large an affordable housing portfolio, and it's our intention to operate it in the same vein.

GlobeSt.com:Is the SHS transaction typical of what we should expect from Avanath?

Carter: We're seeking other asset and portfolio acquisitions in the affordable and urban housing space. We would be very interested in other transactions similar to SHS.

Instant Insights /

Avanath Capital Partners' Daryl Carter

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