Forum Capital buys real estate debt and repackages it into funds to make it accessible for retail investors.
Beth Mattson-Teig | Sep 07, 2021
Investors searching for income often say they want more opportunities to invest in commercial real estate debt, and Denver-based Forum Capital Advisors LLC is one firm that is listening. The asset management firm has introduced a fund that aims to deliver monthly income with a commercial real estate debt fund that is accessible to accredited investors.
The Forum CRE Income Fund (FCREIF) may look familiar to some investors. It has the same management team, investment goals and thesis as its predecessor fund, the Forum Integrated Income Fund, only in a new regulatory wrapper. Forum Capital converted the prior fund to a ‘40-Act private placement format (a private placement continuously-offered closed-end tender fund focusing on investment opportunities within commercial real estate debt regulated by the Investment Company Act of 1940) in May to make it easier to distribute broadly, as well as make it more amendable to investors with features such as quarterly liquidity, monthly distributions, dividend reinvestment plans and monthly access and pricing (See footnote 1 for important information).
“It was really an effort to make it a fund that was more investor-friendly and easier to use,” says David Kasprzak, senior managing director at Denver-based Forum Investment Group. FCREIF is designed to provide access to commercial real estate debt investments at a time when investors are looking for better portfolio diversification alternatives and new income options, he adds. Forum Capital Advisors is a boutique asset management firm and affiliate of Forum Investment Group.
WMRE recently talked with Kasprzak to hear more about the fund strategy and his views on investment opportunities ahead for CRE debt.
This Q&A has been edited for style, length and clarity.
WMRE: FCREIF invests specifically in commercial real estate debt investments. Can you describe your strategy in terms of the types of debt and where you are placing capital?
From a portfolio manager’s viewpoint, having latitude to move around is pretty attractive. The fund allows for purchases of private and public real estate debt and does not have mandates or limitations on the size of the loans or the type of issues that we look for. Again, that flexibility for the portfolio manager is attractive and really brings it down to the fundamentals of the underlying issue, the sponsor of that particular debt and the real estate that supports it as to whether or not we would want to invest in it.
As long as the fund invests in commercial real estate debt, it is really up to the portfolio manager, Pat Brophy, our internal debt team at Forum and also the debt team at Janus Henderson who is our strategic partner on this fund, to source the deals, conduct the analysis and due diligence on the issuer and the underlying real estate, and then present that to the investment committee for approval.
WMRE: So, you are buying loans and not originating debt?
David Kasprzak: Correct, we are buying existing debt. The team at Forum has experience in originating loans and we do have latitude in the portfolio to be able to originate loans, but in this case, we are buying loans. Right now we’re focused on permanent loans2. We do have the ability to look at mezz debt2and preferred equity2, but that is not a focus right now.
WMRE: Where are you sourcing loans from?
David Kasprzak: Primarily banks and also the vast amount of contacts we have on the private side.
WMRE: Your announcement noted that the new fund was motivated in part by strong performance of Forum Integrated Income Fund and in response to feedback from existing investors. What do you think is driving investor interest in debt?
David Kasprzak: First and foremost, yield and income continue to become increasingly difficult to find and access in this low interest rate environment. Quite broadly, investors are struggling to find income-producing investments. We hear that loud and clear. It’s no secret, but what does the industry do to address that? We have found that our first offering, the Forum Integrated Income Fund, really grabbed the attention of investors. Next, we really think that the low correlation of the asset class to the broader public markets and to public issues is another factor that is driving people to look towards debt as they try to reduce volatility of their portfolios and lower their overall correlation to the marketplace.
Finally, access to quality managers is an ongoing issue, particular those with a more institutional slant. Institutional managers often get a first look, particularly when it comes to debt and private equity. So, you put all of those together and it is driving a significant amount of interest in the debt space generally. Commercial real estate debt is really now just starting to look attractive because of the traditional lack of access, plus awareness. There have been some misconceptions in the past with investors, and frankly with some wealth managers as well, as to what exactly commercial real estate debt entailed.
WMRE: Can you share any numbers on how large the FCREIF fund is currently and if you have any specific goals?
David Kasprzak: After our August close at the end of the month we expect to be right around $70 million to $75 million, and I anticipate that next year at this time we will probably be pushing the $175 million to $200 million mark. Every year thereafter we would be set to add a couple hundred million dollars in AUM on top of that. For us, thoughtful growth is really important. We have seen a lot of real estate funds in the industry, of all sorts, grow exponentially with explosive numbers. I’m not sure that is always the best for investors, because I don’t know that fund managers can source deals that quickly. That kind of explosive growth is tough for an asset manager to allocate to. So, our approach of thoughtful asset allocation will serve us very well in the long run.
WMRE: The minimum investment amount is $50,000. Who are your main investors?
David Kasprzak: Because it is a private ‘40 Act fund, the target audience is accredited investors2. As we sit currently, the investor base is primarily high-net-worth investors who access us either directly or via an allocation by their wealth manager. Some of those high-net-worth relationships that we have had over the years were single- and multi-family offices, but primarily it is high-net-worth individuals who are investing with us. At some point, we could convert to a public 40 Act, at which point it would be available to all investors.
WMRE: What channels do you use to source your investors?
David Kasprzak: Traditionally, we have been word-of-mouth and referral based on our investments, for our direct syndicate deals and for our FCREIF and its predecessor fund. Now what we’re seeing is that we are starting to pick up some momentum in the wealth management space, particularly with registered investment advisors.
WMRE: Do you run into any special issues in working with those HNWIs or family offices?
David Kasprzak: There really aren’t any issues. What they look for is a high level of service, and the key to what we do is provide a superior investor experience from top to bottom. Whether it’s how they get their paperwork processed, receive updates or how timely they get distributions, we really feel that that is what they want. We also think that in the family office and high net worth side, they truly appreciate a higher level of quality communication and transparency, and there is a quantity versus quality aspect. Sending out frequent information, if it doesn’t hold value, is useless to them. What they like is really good quality, high touch information. A great example is that we provide monthly updates on the portfolio. That is not necessarily the norm in the ‘40 Act world, but that’s what we feel our investors deserve.
WMRE: There has been a lot of capital raised for debt funds in recent years. How competitive is that market in terms of sourcing debt, and what kind of opportunities are you finding?
David Kasprzak: It is competitive, but what is interesting is that the debt market has been split into multiple channels. You have private debt, corporate debt, public real estate debt and private real estate debt. So, there are a lot of sub-tranches within debt in general. There has been a lot of publicity about the amount of capital that has flowed into debt over recent years. But if you look at that capital flow as a percentage of the overall capital markets, it’s really fairly miniscule, and we believe that we are only scratching the surface.
Is there competition? There is always competition for quality issues. We believe we can get a leg up on some of our competition through relationships. If you know a private issuer that is taking something to the market for a raise, you may get a look ahead of everyone else. Those relationships are irreplaceable. Between our network and the network that we have at Janus, we see many investment opportunities on both the public and private side of real estate debt, and certainly our investors have reacted positively to that.
WMRE: What kind of runway do you see ahead for CRE debt funds in particular?
David Kasprzak: When compared to the greater universe of assets, debt is hardly utilized in investor allocations and real estate debt even less so. I think the remaining opportunity is more than significant. To me, this starts with an investor and an advisor getting educated on exactly what debt and real estate debt means and getting that level of knowledge and comfort. Then we keep them interested when they see the results that could be generated through investment in real estate debt, particularly when compared to some of the other asset classes and types. When you consider some of the volatility that we have seen in financial markets over the last 20 years, finding yourself in good real estate debt should dampen that volatility. So, we continue to believe that the market is going to continue to come to us, and we are quite excited about the amount of runway we see ahead.
This article was originally published in WealthManagement.com on September 7, 2021.
1 Quarterly Liquidity: Limited liquidity is provided to shareholders only through the Fund’s quarterly repurchase offers, which will ordinarily be limited to the repurchase of 5% of the weighted average number of shares outstanding in the prior calendar year (or 20% in each calendar year) at NAV, after deduction of any applicable repurchase fee (if within the first 90 days of purchase). There is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer. Each quarterly repurchase offer will ordinarily be limited to the repurchase of 5% of the weighted average number of shares outstanding in the prior calendar year (or 20% in each calendar year). Monthly Distributions: The Fund intends to make a dividend distribution each calendar month to its shareholders of the net investment income of the Fund after payment of Fund operating expenses. There can be no assurance that the Fund's investment activities or its operations will be profitable, that the Fund will be able to avoid losses or that cash from its investments will be available for distribution to shareholders. Dividend Reinvestment Plans: The Fund’s Distributions to shareholders are reinvested in full and fractional shares as described below. A shareholder may designate all or a portion of his or her shares for inclusion in the policy, provided that Distributions will be reinvested only with respect to shares designated for reinvestment under the policy. Monthly Access: The Fund’s NAV per share for each class of shares is calculated on a monthly basis as of the close of business on the last business day of each calendar month. The Fund’s NAV per share for each class of shares will determine the price per share in the Offering and the price that is paid to participants in the repurchase of shares described above. As a result, investors will not know the purchase price per share at the time they submit their subscription agreements. In the event of an increase in the Fund’s NAV per share, the purchase price may be higher than the prior monthly closing price per share, and therefore an investor may receive a smaller number of shares than if the investor had subscribed at the prior monthly price. Monthly Pricing: The Fund will calculate its NAV as of the close of business on the last business day of each calendar month, each date that a share is offered or repurchased, as of the date of any distribution and at such other times as the Board shall determine (each, a “Determination Date”). In determining its NAV, the Fund will value its investments as of the relevant Determination Date. The NAV of the Fund will equal, unless otherwise noted, the value of the total assets of the Fund, less all of its liabilities, including accrued fees and expenses, each determined as of the relevant Determination Date.
2 DEFINITIONS: “Commercial Real Estate Debt" Debt instruments that are secured by commercial property are subject to the risks of delinquency and foreclosures and other risks of loss. "Permanent Loans” are defined as a first mortgage on a piece of commercial property that has some amortization and a term of at least five years. “Mezzanine Debt” Mezzanine debt is the middle layer of capital that falls between secured senior debt and equity and do not provide the Fund with control over the underlying collateral and the Fund will be dependent on third-party borrowers or agents, and will have rights that are subordinate to those of other senior lenders. “Preferred Equity" is a type of loan secured by the general or limited partner interest in an entity that owns real estate or real estate-related investments. Preferred equity interests are generally senior with respect to the payments of dividends and other distributions, redemption rights and rights upon liquidation to such entity’s common equity. Investors in preferred equity are typically compensated for their increased credit risk from a pricing perspective with fixed payments but may also participate in capital appreciation. Upon a default by a general partner of a preferred equity issuer, there typically is a change of control event and the limited partner assumes control of the entity. Rights of holders of preferred equity are usually governed by partnership agreements. "Accredited Investors" an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.
Important Investment Considerations
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 303.501.8804 or visit www.FCREIF.com Read the prospectus or summary prospectus carefully before investing.
Diversification does not ensure a profit or protect against a loss.
Investing in the Fund involves risks, including the risk that an investor may receive little or no return on his, her or its investment or that an investor may lose part or all of such investment. Therefore, investors should consider carefully the following principal risks before investing in the Fund. There is no assurance that the Fund will achieve its performance or investment objectives or achieve any targeted rate of return or return of capital or any target distribution yield. Shareholders may lose some or all of their invested capital, and prospective investors should not purchase the Fund' shares unless they can readily bear the consequence of such loss. Limited liquidity is provided to shareholders only through the Fund's quarterly repurchase offers. There is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer. The Fund's investments are also subject to liquidity risk. Funds with principal investment strategies that involve securities of companies with smaller market capitalizations, derivatives or securities with substantial market and credit risk tend to have the greatest exposure to liquidity risk.
As a non-diversified investment company, the Fund may invest more than 5% of its total assets in the securities of one or more issuers. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by events impacting a single borrower, geographic location, security or investment type. The Fund's investments in real estate debt are expected to be secured by real estate assets. The Fund's concentration in the real estate sector may increase the volatility of the Fund's returns and may also expose the Fund to the risk of economic downturns in this sector to a greater extent than if its portfolio also included investments in other sectors. Further, there is no limit regarding the amount of Fund assets that may be invested in any single geographic area within the United States. To the extent the Fund concentrates its investments in a limited number of assets or geographic areas, the Fund will be subject to certain risks relating to concentrated investments. Commercial real estate debt instruments (e.g., mortgages, mezzanine loans and preferred equity) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential properties. The Fund expects to invest a portion of its assets in pools or tranches of commercial mortgage-backed securities (CMBS)*. In a rising interest rate environment, the value of CMBS may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security's effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. Mortgage loans on commercial properties generally lack standardized terms, which may complicate their structure and increase due diligence costs. Commercial mortgage loans also tend to have shorter maturities than single-family residential mortgage loans and are generally not fully amortizing, which means that they may have a significant principal balance or “balloon” payment due on maturity.
Placement Agent: Foreside Fund Services, LLC
*A security backed by commercial and multifamily mortgages rather than residential real estate.