New York-based Related Capital Co. (RCC) has been a market leader in the affordable-housing business for years and is the third-largest owner of multifamily property. Over the past five years, RCC-sponsored funds have raised an average of $300 million a year. But RCC is far from complacent and has been aggressive in developing new products for the market and in growing its business in new directions.
RCC has stuck to a conservative yet innovative approach to grow the company: Conservative capitalization and underwriting to weather the market's ups and downs, and innovation to create new debt and equity products that satisfy the mid-market developers on the one hand and the institutional and retail investors on the other.
"We have really made a mark in the Low-Income Housing Tax Credit (LIHTC) arena," says Mark Schnitzer, managing director of RCC and director of its Tax-credit Acquisitions Group. "But we do not want to be viewed as just providing a commodity, which is what the tax-credit business is considered by some. The challenge for us is: How does Related Capital diversify the company while retaining our base of loyal customers?"
RCC has answered that challenge by leveraging its well-known affordable-housing equity program and expanding into three new publicly traded businesses: CharterMac, AMAC and Aegis Realty Inc., all based in New York.
RCC's foundation is its tax-credit business, which provides the financial wherewithal and strong customer base that RCC has leveraged to form its newer business ventures.
RCC has two constituencies to please to be successful. "There are two sides of this business - the investors and the developers," says Schnitzer. "We have been fortunate to have a good reputation in the investment community. I think they are impressed with us both as a development company and a finance company."
The company's tax-credit products include traditional placements and agency-guaranteed product. The more traditional placement comes in several forms. One type of placement typically is made up of 15 to 20 properties and admits three or four investors who provide equity for LIHTC properties in return for relief from federal taxes. There are funds that target just California, and there are also proprietary funds offered to single investors that seek to capitalize on particular political or real estate market dynamics.
In its effort to attract new investors, RCC also offers investment vehicles that are guaranteed by Fannie Mae. According to Schnitzer, these "typically attract investors interested in leveraged-lease-type investments or those just testing the tax-credit waters for the first time."
CharterMac In late-1997, RCC formed Charter Municipal Mortgage Acceptance Co., or CharterMac. CharterMac is a publicly traded company that originates and acquires tax-exempt bonds and uses the proceeds to finance affordable housing. In return, investors are rewarded with a quarterly tax-exempt dividend that now averages around 7.25%.
CharterMac was created by consolidating three RCC-sponsored partnerships that held 32 tax-exempt first-mortgage bonds valued at $300 million. The fund has grown to 57 tax-exempt bonds in 15 states with a value of more than $500 million.
According to Stuart Boesky, president and COO of CharterMac, the goal for the company was to transform the tax-exempt financing process into one that mirrored the conventional-financing process. "With this model, CharterMac would serve as the lender - like a bank or an insurance company in a conventional, taxable deal - and the borrower/developer deals directly with us," says Boesky.
According to Boesky, the depth of RCC's affordable-housing business allows for unique advantages for the developer/borrower, including lower costs and more timely transactions. The advantage originates with the way the company buys bonds: CharterMac is a direct buyer of bonds that are neither credit-enhanced nor rated. This eliminates the need for investment bankers, credit enhancers and rating agencies; buying directly can translate to savings on upfront costs for those seeking financing.
CharterMac is not technically a mortgage REIT - a group it has been lumped together with in the past - and the company's risk profile is one way the firm is set apart. CharterMac limits its leverage to no more than 50%. Unlike many mortgage REITs that own interest-only strips on bonds backing single-family units, CharterMac buys only long-term, fixed-rate bonds.
The aversion to risk served CharterMac well through last year's market upheaval. 1998 was a strong year for earnings and bond acquisitions. "In 1998, earnings and bond acquisitions exceeded our projections by 40%," says Boesky. "It looks like we will achieve the same type of performance this year too. We had a $150 million bond-acquisition target which we reached by the end of the third quarter. By year end we expect to have acquired $200 million to $250 million worth of bonds."
A $90 million preferred equity offering in July - the company's first attempt at accessing the equity market - was well received by institutional investors, according to Boesky. "We have been positioning ourselves to increase our institutional following," says Boesky. "We will probably go to market with a $75 million to $100 million common stock offering during the first quarter - we expect a 50-50 split between retail and institutional money."
AEGIS Realty Inc. Aegis Realty is part of RCC's continuing evolution from a firm concerned solely with affordable-housing debt and equity to a more diverse commercial real estate company. AEGIS is a REIT with a portfolio of 28 neighborhood shopping centers, two garden apartment complexes and a participating FHA co-insured mortgage loan. The company was a consolidation of existing partnerships, similar to the organization of CharterMac.
Boesky thinks the small-cap REIT is an attractive stock. "Last year we doubled the size of our portfolio by purchasing properties we felt we could reposition. With the equity markets off, now is a good time for us to focus on internal growth," says Boesky. "Our balance sheet is solid; more than 50% of our revenue comes from credit tenants; we carry only 30% debt-to-asset value, and our stock is trading at close to 40% of its net asset value - it is a great value." Boesky also sees AEGIS, with its strong balance sheet, as a possible consolidator of smaller cap REITs in the future.
AMAC The American Mortgage Acceptance Co., or AMAC, is RCC's latest effort to diversify its business outside of the tax-exempt arena. The low-risk mortgage REIT differentiates itself from the typical mortgage REIT in three ways. First, the fund has a maximum leverage of 50%; the typical mortgage REIT has an average leverage of 75%. Second, AMAC focuses on government-insured mortgages and low-risk affordable housing.
"At least 40% of the loans we own will be insured either by FHA or GNMA," says Boesky. "We have recently bought some subordinated CMBS since we expect spreads to narrow and default rates have continued to decline. But, our allocation to subordinated vehicles will remain below 30%."
Third, AMAC has devised an origination program as part of a joint venture with Fannie Mae that avoids spread risk and allows developers to access rate-forward financing for construction to permanent loans.
The fund will also invest in what Boesky calls participating FHA loans on market-rate multifamily. He explains the investment: "Developers process the application and receive the FHA commitment. AMAC then buys the FHA mortgage and offers the developer a subordinated loan, which raises the proceeds to the borrower. In return, AMAC receives part of the cash flow and appreciation."
RCC is one of the most well-known providers of affordable-housing and tax-exempt equity and debt products. However, the latest business ventures are proof that this company is not sitting still and is not limiting itself to its bread-and-butter business.