643 Capital Management Seeks Distressed Opportunities

SAN FRANCISCO-643 Capital Management, a private investment firm focused on debt and equity strategies in distressed real estate, recently revealed it has left McKinley Partners. The new company is led by managing director Gregor Watson, co-founder of McKinley, and will be joined by Watson’s acquisitions team, which has an established track record of acquiring over 500 homes and plans to invest up to $200 million in the coming year. GlobeSt.com caught up with Watson to discuss where the company is focusing on investment and a little bit about how he finds the deal, or his “secret sauce,” as he puts it.

GlobeSt.com: Tell us about the decision to leave McKinley Partners, what that means for 643 Capital Management and what and how much you plan to invest in during the coming year?

Watson: Leaving McKinley allows me to focus on a very specialized asset class and recruit executive level talent into a specific strategy. It was a tough decision to leave and I have some great partners at McKinley. We have made fantastic investments together. The launch of 643 Capital allows me to take advantage of a great opportunity that requires specific talent at the senior management level. 643 Capital is built to provide a multi-strategy approach to non-core real estate. We will focus on mid-market investments where there is less competition at scale strategies like our single-family rental platform that allows us to deliver outsized returns due to inefficiencies in the market. We expect to invest between $150 million to $200 million over the next year.

GlobeSt.com: How about property type? How is each faring? Also, you’ve looked a lot at single-family—are you planning to expand your search to include other property types?

Watson: Single-family rental is a ripe market right now. We entered the market at the end of 2009 and have grown this platform substantially over the last few years. We are now expanding this platform along with our institutional partners across the West Coast. We expect to add another three to five markets in the next six months to our existing platform. We launched our debt platform in 2010 while at McKinley, and have brought that fund and the team over with me to 643 Capital. This team is focused on both buying non-performing whole loans, mostly value-add multifamily and retail, as well providing high interest debt to investors buying assets out of banks. We will be launching a participating debt vehicle that would allow our investors to get a current yield as well as some upside. At this point in the cycle, we still feel there is risk but we want to make sure we participate in some of the upside should a rebound surprise us.

GlobeSt.com: When you look at distressed single-family houses, where are the opportunities when looking at it geographically? Second Tier and Third Tier regions?  

Watson: We focus on jobs and the potential of new product being delivered when demand for new housing starts again. We want to ensure that as the market rebounds we are not in an oversupply situation before we put our for sale sign in the front yard. If an area passes those two tests, we focus on yield. A lot of investors in the single-family rental space are going to get burned if they’re only playing for a market recovery. A real recovery could take years. This is a yield play on an asset that is difficult to manage and difficult to scale. If you don’t have the right infrastructure and scale in a given market, the operating costs will eat you alive.

GlobeSt.com: Any specific hot spots?

Watson: Phoenix is a market that we would like to invest in but it is overheated with investor activity. It is also a market that can deliver new product at a staggering pace if the public builders reenter the market with fury.

GlobeSt.com: How do you find the deal? Do you work directly with lenders? Are relationships important? Talk a little bit about that.

Watson: You want my secret sauce? Most of our deals come through relationships in our vast network. This is the platform where we have really been able to set-up a manufacturing model. You must be selective in sourcing deals in the single-family rental space. Every day our team of analysts underwrites hundreds of homes in a given market and we are looking for the needle in the haystack. We’re finding that one home in an area that is mispriced—and that we have better information on than our competitors.
All the due diligence is done through our proprietary technology, a cloud-based system that is used throughout the field. Our people use it for everything from underwriting to property management. Sometimes it feels like we are a technology company that happens to be investing in real estate. Our field team uses iPads and we have built our own apps to accomplish all of our daily tasks.

GlobeSt.com: You recently mentioned that you like to keep the people whose homes foreclose in their homes as renters. That isn’t something you hear every day. Tell us about that process and how it has worked out thus far.

Watson: One of the most fulfilling parts that have come out of our single-family rental strategy is the great feeling we have around helping to stabilize neighborhoods, keeping families in the same area and their kids in the same school. The government’s proposed program has the potential to be a win for all parties involved. Win one: the families get to stay in their home as renters in most cases paying far below what they used to pay as a mortgage payment. Win two: the government or banks like Bank of American’s deed in lieu lease program actually can speed up their loss mitigation and move assets off their balance sheet more quickly. Win three: investors are able to scale their model which will provide better tenant services and receive an attractive yield on their invested capital.

(Visit the Distressed Assets page on GlobeSt.com.)