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Investment
Strategies

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Residential Land

Development

Build for Sale | Build For Rent

Residential housing in the United States is experiencing a material, structural shortage in the millions of units / year. AEG targets land purchase opportunities in the Carolinas whereby we lock up land and determine the feasibility of its development. Development suitability depends on various qualitative factors such as environmental suitability, entitlement risk, topography, area demographics, and nearby supply. These factors serve as the inputs in our quantitative analysis. We quantify the full cost to develop, the strength of absorption/demand for the end product, and we determine if our projected profit margin justifies closing on the land and executing on the development. AEG leans on its experienced engineering partners to determine the feasibility of development opportunities as efficiently as possible. In doing so, we can quickly sort and vet opportunities. Our team will either develop lots (pads), construct homes, or develop rental products subject to our comparative financial analysis. We will never pursue development opportunities that do not provide us with a strong margin for error to account for value declines. Every single one of our deals has a built in contingency and > 25% gross project margin. Once market valuations fall near the replacement cost to develop new assets, we will shift our focus to new acquisitions. Sometimes, that means looking far ahead and offloading deals prior to full development. If values are trending downward and challenge our required minimum margins, we will move out of our positions.

Acquisitions

Asset Class Agnostic 

Real Estate investing is all about location, math, and time. We are opportunistic in nature, and we do not limit ourselves to a single asset class. Structuring deals with multiple exit strategies ensures that we will not lose our original capital, even if things don't go as planned.

As certain asset classes become over-saturated, others become more favorable acquisition opportunities. Just as development opportunities only make sense when investors pay us much more than the cost to develop a new product, acquisition opportunities only make sense when we can buy at significant discounts to reconstruct the same asset with today's construction costs.


 

01.

Industrial

02.

Apartments

03.

Mobile Homes

04.

Retail

05.

RV Parks

DEVELOPMENT SCOPE - THE PROCESS

Equity

1.

Source Deal / Initiate DD

Source land and put it under contract after a preliminary financial and feasability review.

EQUITY

Source Deal
/ Initiate DD

LAND LOAN / EQUITY

Due Diligence

Entitlements / Approvals

Close on
Land

CONSTRUCTION LOAN & EQUITY

Horizontal Construction 

Vertical Construction

PERMANENT LOAN / EQUITY

Sale / Permanent Loan

Source land and put it under contract after a preliminary financial and feasability review.

Engage engineers and architects to draw up the land. Perform feasibility studies and environmental tests. Collect bids for construction. Create site plan / platt map.

Work with relevant jurisidctions at the county and city levels, such as county/ neighborhood planning commissions, zoning review boards, and architectural review boards. Obtain approval for development. 

Secure relevant permits and close on the land.

Complete horizontal construction such as grading, road and lot infrastructure, and utilities.

Complete vertical construction with GC and subcontractors.

Once the assets are built, either sell and return capital or refinance into permanent debt once the project is stabilized.

Differentiators

Investing Across the Capital Stack and Risk Spectrum

Common Equity

Last position to earn returns, first position to lose capital, unlimited upside return potential, limited to no control rights

Last Payment

First Loss

Preferred Equity
Mezzanine Debt

Includes preferred equity and mezzanine debt. Second to earn returns, second position to lose, capped total returns, limited control and default remedy rights

Last Loss

First position to earn interest and receive original capital back, last to lose, total control and default remedy rights

Senior Debt

First Payment

We provide credit (debt) offerings as well as equity offerings to service investors who have different risk tolerances and goals for their capital. Everybody has unique financial and lifestyle circumstances, and we cater to those needs through our  various opportunities.

During uncertain times, it often makes sense to invest lower in the capital stack to protect the downside risk of your investment. Debt investments are fundamentally more secure because in the event of borrower default, assets can be foreclosed on and resold. First position, senior loans are secured by mortgages or deeds of trust on property. Typically, values would have to fall greater than 25%+ for a debt investment to risk losing any original capital. Even then so, sponsors holding mortgages on property can hold & improve the assets until the market improves, preventing any need to 'firesale' the property for below-market value.

The correlation between the value of an asset and its underlying debt is strikingly low, protecting investors from value fluctuations in market downturns. During stable times, it can make most sense to invest in equity in search of high returns. Although equity takes the most risk, deal structure can significantly help reduce common equity's exposure to potential losses.


 

Return

Risk

Core

Core Plus

Value-Add

Development / Opportunistic

Deal Type

​

Core

​

Core Plus

​

Value-Add

​

Development / Opportunistic

Investor Appetite

​

REITS, PE, LifeCos, Pensions, Endowments

​

REITS, PE, LifeCos, Pensions, Endowments

​

REITS, PE, Syndicators

​

REITS, PE, Private Developers

Levered IRR Targets

​

6-9%

​

9-13%

​

13-18%

​

​18%-25%+

In general, the commercial real estate industry agrees on four buckets of risk & return. Investors demand higher returns for higher risk deals. Conversely, investors accept lower returns for lower implied risk in deals. While there is a  consensus for deal classification, there are blurred lines and overlap in strategies.

We employ safe, low return strategies when the market is volatile, and we look to position ourselves higher on the risk spectrum during stable times, when the reward warrants the risk. 


 

IRR stands for internal rate of return. The IRR is an annual rate of return that takes uneven cashflows throughout an investment hold period and computes them on an annual basis by discounting future cashflows more than earlier incurred cashflows. Compared to a simple annual rate of return, IRRs capture the time value of money component, so it is more than just taking total profit and dividing it by the number of years you held an investment. 

If we did not have inflation (expansion of our money supply and loss of our purchasing power with the US dollar), the IRR would not be as significant. As investors, we have to compensate ourselves for the loss of a dollar's purchasing power because without the ability to buy resources, the dollar, or any currency, is worthless. We must also compensate ourselves for the opportunity cost of capital. If funds sit idly, you not only lose value to inflation, but you give up the opportunity to invest and earn a return. Investors command risk premiums for these factors.

In commercial real estate investing, investors require an annual rate of return that beats inflation and their opportunity cost. To demystify the risk / reward chart above, think about the concept like this. Investors demand a greater return over risk-free treasury bills that the government offers (a proxy for inflation) for riskier deals than they do safer investments like debt investments. Treasury bills are bonds and they are considered the safest investments in the world since they are backed by the government of the world's reserve currency, the US dollar. Since real estate is riskier than T-Bills, investors demand a higher return to account for the depreciation of real property and cash required to maintain buildings as they degrade over time.

 
At Alpha Equity Group, our goal is to 1) produce returns that beat inflation and 2) produce the highest returns for the lowest unit of implied risk. By analyzing hundred of deals ever year, we have confidence in our abilities to accurately price the risk in our deals. 

 

Investment Geographies

Carolina Based. Carolina Focused.

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