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Waterton Looks at Five West Coast Markets as it Looks to Allocate $2.5B Residential Fund

Waterton, Waterton Residential Property Venture XV, San Diego City Employees’ Retirement System, San Diego, Los Angeles, San Francisco, Bay Area, Seattle, Portland, La Mesa, Pacific Urban Investors
Photo by Leslie Lopez Holder on Unsplash

By Jon Peterson

West Coast coastal markets continue to have strong appeal for all types of institutional investors. Chicago-based Waterton, which is actively raising money for one of its latest funds, is looking to place investment dollars into five targeted markets on the West Coast as part of its investment strategy for its new commingled fund called Waterton Residential Property Venture XV. This information was provided in a recent presentation the fund manager made to the San Diego City Employees’ Retirement System.

The targeted markets include San Diego, Los Angeles, the San Francisco Bay Area, Seattle and Portland. Naturally, the fund will be looking at investment opportunities across the country, and other markets where it will concentre its focus include Salt Lake City, Phoenix, Chicago, Atlanta and Philadelphia.

Waterton has already invested in one of the West Coast markets previously. The company recently acquired its first-ever apartment asset in the San Diego area when it purchased the 406-unit Veranda La Mesa complex in La Mesa, a suburb of San Diego. Waterton acquired the property for its commingled fund Waterton Residential Property Venture XIV, according to industry sources. This commingled fund had a final capital raise of $1.5 billion, which was finalized in February 2021. The seller of the property was Palo Alto-based Pacific Urban Investors, according to public records.

Waterton has been in the market raising capital for Fund XV for a little while. It wrote in a board meeting document that it is targeting a first close for the commingled fund on December 8th with commitments of $1 billion to $1.2 billion. The commingled fund is seeking total commitments of $2 billion with a hard cap of $2.5 billion.

A potential new investor in the commingled fund is the San Diego City Employees’ Retirement System, which is considering issuing a $25 million commitment to the commingled fund. Waterton will likely be making a co-investment into the new fund of the lesser of 1 percent of total commitments or somewhere around $20 million.

The main investment strategy for Venture XV will be to acquire existing Class A and B complexes that have a value-add opportunity. This would include properties that have renter-by-necessity occupants in high barriers to entry areas and favorable long-term characteristics, as described in the presentation. The targeted assets would be those that generate cash flow, but offer the potential for value-add appreciation in markets with sustainable demographic, economic and growth capabilities.

The new commingled fund will have two new additional sub-strategies for the residential property fund series. One will include investments in ground-up development projects, and an allocation into this type of asset is capped at 25 percent of the equity commitment. Properties in this category could include add-on development on existing assets, completion of stalled construction projects, conversions from hotel or office to multifamily, and ground-up development on entitled land.

The other sub-strategy the fund will consider includes single-family rentals. Waterton recently partnered with Tampa-based Second Avenue Group to target acquisitions of horizontal multifamily and existing single-family rental communities that are 100 units or larger.

Venture XV will be trying to make investments that can produce net IRRs in the range of 12 percent to 13 percent. The amount of leverage planned for the commingled fund is the greater of 65 percent loan-to-value of loan-to-cost.