Adam Portnoy: So at the time — you’re right, you have a good memory, Mitch, in terms of we tried something like this. It’s similar. Two different — one different asset class, obviously, different time. Second, we’re working with a very reputable placement agent on this capital raise that we’re engaged in right now. We’ve also learned a lot including from that exercise that you’re mentioning from six, seven years ago about how is the best way to organically create a fund. And I think we’ve learned from all those experiments and all those twists and turns, especially what we did several years ago that you’re referencing. I feel very good about our ability to be able to raise this capital. It was also the biggest — maybe the biggest difference is the return profile.
We were trying to raise at the time a core office fund, core meaning high single digit return IRRs. Here what we’re talking about on a levered basis, we’re talking about mid teens IRRs. And so it’s a different investment profile, different return expectation, which is partly based on what we’ve learned and talking to the market. I feel very good about our ability to execute on this. Timing, how long it’s going to take, that’s a little bit of a wild card. Could it take one quarter, could it take four quarters, I don’t know till we actually get all the money in. But I’m confident we will raise money is the best way to say it. And I wouldn’t be putting the RMR balance sheet at use here unless I had some pretty strong conviction that we were able to use it to start one of these funds.
Operator: The next question is from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem: Just a couple of quick ones from me. Just staying with the sort of capital raising for Tremont. You talked about sort of $100 million. Just trying to get a sense of what the opportunity set, what the pipeline is and is there sort of a target, is this something that could be $200 million, $300 million, what sort of the thought of how this was going to evolve over time?
Adam Portnoy: So just to be clear, we talked about up to $100 million gross investment that will use our balance sheet, and it’s a little confusing when I say that, that’s inclusive of leverage. We’re going to use leverage on these loans. So let’s just use the round number $100 million of our gross investments, $70 million of which will be debt, $30 million of which will be equity in the loan or use of our cash. That is to seed a portfolio or a fund that is not the total fund itself. We expect that the fund itself, from an equity perspective, will be $200 million to $400 million in equity. Use leverage on that and you’re talking about total investments of around, call it $1 billion give or take. So that — I just want to be clear, that’s what we’re trying to do with the balance sheet to seed the portfolio but the ultimate size in this first fund raise, I should point out, is about $1 billion.
In terms of the pipeline, again we feel very good about the pipeline. Yes, there is less transaction volume going on in the marketplace today. As a result of less transaction volume, there are less loans being originated. Fully half of what you used to see in originations of loans was new acquisition financing. Well here, there’s not a lot of new acquisition financing. There is some but not much. It’s a lot of refinancings that we’re underwriting. But from a risk return perspective, we’re making first lien secured mortgages against performing real estate that’s going to go through a value add or a light value add repositioning. And it doesn’t really matter what type of real estate, because we’ll lend against almost anything. And that type of investment [produces] mid teen returns.
The pipeline is very strong and we also think we differentiate ourselves in the marketplace. Look, there’s a lot of folks that are talking private credit and private credit real estate. What really differentiates us from — in the marketplace is we are a real estate operating platform. So we have perhaps a more robust underwriting of the loan itself. But also we are able, given our scale to be much more middle market focused. So our average loan size could be $20 million, $30 million versus many of the larger players are focused on let’s say $100 million larger loans. So when we play in what we call that middle market tier, there’s a tremendous amount of transaction volume and not as many players. So we don’t have as much competition and actually leads to a little bit higher returns for the investors.
So yes, we feel good about the pipeline. We feel good about the investment opportunity we’re presenting to potential LPs.
Ronald Kamdem: And then my second one was just going back to RMR Residential. I think you made some comments about dry powder, potentially sort of opportunities in the second half of the year and tracking 100 deals. Just can you talk a little bit about the return profiles of those deals? And is there any sort of thematics across those hundred deals and the type of properties you’re looking at?
Adam Portnoy: So we’re targeting again sort of value add turnaround or light turnaround properties in the multifamily space or apartment buildings in the Sunbelt region where we currently operate. The return hurdle — when we referenced that hundred deals in the pipeline, we’re talking about that type of characteristic deal that is going to hopefully produce a mid to high teen IRR for the investor. So that’s a general outline of the type of deals we’re looking at. And when I said 100, they serve all in mixed fashion meet those criteria in some way.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Adam Portnoy for any closing remarks.
Adam Portnoy: Thank you all for joining us today. Operator, that concludes our call.
Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
