In recent years, the number of Israeli developers managing real estate investments overseas has grown, ranging from the major institutions, which have begun investing directly in real estate, to private special purpose investment funds. One of these funds is Alto Real Estate Fund, which buys and upgrades commercial income-producing real estate in the US, and is in the midst of the ongoing raising of its second fund, after achieving good results with its first.
”Over the two and a half years during which the first fund was active, we increased the value of the investments by 54%. As of the end of 2014, we returned $8.3 million to the fund’s investors, amounting to 33% of their total investment,” the two founders, chairman Mody Kidon, known mainly as an advertising executive (Gitam BBDO), and CEO Yaniv Melamud, a former investment manager at Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), wrote to the investors in the first fund.
I wanted to set up a private equity fund,” Kidon says, explaining how he got into the field. “When the global credit crunch came, I saw everything was in the red, and I thought that even if the world turned upside down, I’d still have real estate. Then I got the idea of setting up a platform that would make it possible to invest in real estate like the investment institutions. I met Yaniv, and we decided to become partners.”
The partnership in the Alto fund is not Kidon’s first investment in real estate. In 1994, Kidon and his partner, Moshe Teumim, sold a stake in Gitam to international advertising firm BBDO, and got their hands on some money. “There was no Family Office then, and no one taught me what to do,” Kidon says. “I learned, and was advised to invest in real estate.” He began investing in the sector with partners, and was also among the founders of real estate company Vitania, in which he has been a director from the beginning. He also led the purchase of Gitam’s current building, and managed its construction.
Kidon is a former air force pilot. His entry into the advertising industry, which made him a public figure, also came about by accident. “After my release from the army, I wanted to study for an MA in the US. Then my cousin, Moshe Teumim, who founded Gitam, told me that he needed me, and talked me into it. It was the bravest and most bizarre decision I ever made.” Many years later, the two men turned Gitam into one of the most prominent firms in Israeli advertising, and they became very well connected in the business milieu, and not only there.
One example of this came a month ago, when Kidon notified the Court that he was holding NIS 2.3 million for his close friend, former IDB Holding Corporation controlling shareholder Nochi Dankner. He was responding to an attachment order recently issued against him that alleged that he was holding funds belonging to Dankner. This figure was disclosed after a report purportedly describing Dankner's financial situation, written in his handwriting and stating that Kidon owed him NIS 3 million, was presented in the criminal case against Dankner in the share manipulation affair.
Aimed at medium-sized institutions
”When we first started in 2010, we bought eight properties in six deals. We sold these properties and posted an average net IRR of 28% per year. Then we founded the first fund,” Kidon and Melamud say about the fund that got under way two and a half years ago. “We raised $25 million, and the investors co-invested another $3 million. We did seven deals in the first fund: one in Germany and the others in the US.”
Alto 2, launched in February 2014, already has two financing rounds behind it, about which Kidon says, “Our goal is to raise a total of NIS 500 million ($125 million),” an amount that is designed to enable them, with the addition of money from local partners and leverage (“every deal has 60-65% leverage”) to make investments totaling $500 million.
The second fund has raised $50 million so far, and a third round to raise another $30 million is slated for completion by July 2015. “We have already invested $33 million of the $50 million we raised,” Kidon and Melamud say. Most of the deals that Alto is making and aiming at are in the $15-50 million range, after leveraging the capital from the company and its local partners in the US.
As of now, Alto has already raised institutional money from Ayalon Holding Ltd. (TASE: AYAL) and from company funds that manage investments through external investment houses. “We’re doing a road show for company funds,” the Alto partners say, referring to the institutional money that is not from the largest groups.
”Globes”: And what about the largest investment institutions?
”They have their own real estate divisions,” Kidon answers.
Kidon says that he and his partners have purchased 23 properties for $528 million (over NIS 2.1 billion) to date. “We’ve had 11 exits, in which the net annual IRR for the investors was 34%. They were paid the money after management fees and success fees were deducted. In two properties sold to date in the first fund, we’ve already returned 66% of the money invested in two and a half years, and they are regularly receiving more (from rent, R.S.). The surplus value of the fund’s remaining properties is greater than the investors’ initial investment. The only fund that could possibly compete with us in these returns is Ishay Davidi’s FIMI Opportunity Funds, which is the model that I’m imitating.”
”Like the Schuster Center in Ramat Aviv”
A month ago, Alto 2 acquired a commercial center with 9,300 square meters of space in San Antonio, Texas at a cost of NIS 63 million. This was an open-air commercial site built in 1996. As part of this deal, a three-year loan at 5.25% interest amounting to 65% of the deal was taken. For the managers, this is a good example of Alto’s deals. “This deal has potential, and will start producing cash flow in six months; there is also more potential for construction there,” Kidon says.
Asked what guides them in investments, they cite five investment rules beyond the basic criterion of location: “First of all, we’re selective about our partners. Secondly, we always operate with a local partner - there are gaps in knowledge everywhere. In the US, deals are conducted mainly through brokers, and the relationships with them are critical. Thirdly, the local partner provides at least 30% of the equity, in order to create an identity of interests. Fourthly, our local partner varies from one place to another. Finally, we invest in only one type of real estate: value added retail.”
Melamud says, “In the US, in contrast to Europe, the great bargain prices that were available because of pressure on the sellers are already gone. We have therefore focused on smaller cities. In the US, there are excellent cities that still have opportunities. We decided to concentrate on the second tier retail sector in the US, and this focus is proving itself in the end.” Asked what exactly he means, he explains that these are shopping centers in the heart of densely populated neighborhoods in the group of cities just below the biggest ones, “sort of like the Schuster Center in Ramat Aviv”: leading cities that are not mega-metropolises. According to Kidon, despite the recovery in the US economy and in property prices there, “Retail has not yet returned to normal; that is expected to happen in 2017. For us, that means that there is potential there.”
What management fees do you charge?
Melamud: ”In both the first and second funds, we take 2% when the deal is made, not on the commitment, and only on our share, and in a one-time payment. In addition, we charge a management fee amounting to 0.75% of the assets. Beyond that, there is an 8% return threshold, above which there is a success fee of 20% of the surplus return."
Published by Globes [online], Israel business news - www.globes-online.com - on March 12, 2015
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