For RIAs interested in bringing more alternative investment choices to their less wealthy clients interval funds are becoming increasingly more popular among assets managers. The interval fund structure does away with some onerous documentation requirements for the advisors, lowers investment minimums and makes it easy for investors to opt-in because it can be accessed through commonly available custodial platforms like Charles Schwab and Fidelity Investments.
Pender Capital Management, a Los Angeles-based alternative income and capital management firm, is the latest asset manager to endorse the interval fund strategy and it is currently raising money for its Pender Capital Real Estate Credit Fund. Like many funds that seek to take advantage of the current dislocation in the real estate capital markets, Pender Capital Real Estate Credit Fund is focused on providing one- to three-year senior secured bridge loans. But unlike many of its peers in the credit fund space who are looking at the larger loan amounts, the fund seeks to pick off some of the business that has been the purview of regional banks—loans ranging from $10 million to $30 million in secondary and tertiary markets primarily in the Sun Belt.
In past conversations with RIAs, Pender Capital executives often heard that the firm’s investment offerings were attractive, but could only be a fit for a select subset of clients. That’s why in April of this year, the firm decided to launch an interval fund, with an investment minimum of $10,000 and no accreditation requirements. WealthManagement.com recently spoke to Pender Capital Co-Founder and CEO Cory Johnson about the firm’s investment strategy, its evolving relationship with RIAs and wealth advisors and the appeal of interval funds.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: We wanted to talk about this new Pender Capital Real Estate Credit Fund. To start with, can you tell me what amount of money you are planning to raise for this fund?
Cory Johnson: Yes. Pender Capital Real Estate Credit Fund—it’s an interval fund structure, so closed-end, but continuously offered. We are looking to raise starting in the $1 billion range. Obviously there’s no hard cap on that, but $1 billion is the initial target.
We are a credit manager that specializes in senior secured commercial bridge real estate positions in domestic U.S. We are really more in the flyover America or the Southern "smile" states. What we are ultimately doing is targeting lower middle market loans—loans in the $10 million to $30 million range, with a geographic focus that’s really more secondary and tertiary markets in those Southern states.
Investors that we are targeting are RIAs, multi-family offices, endowments, foundations. They are coming to us because they are seeing the opportunities that are starting to present themselves due to some of the banking dislocation that is happening across the country. So, we formed an interval fund because it removed the accreditation standards, the minimums are much lower, now it’s getting 1099s. It’s really something that has allowed more RIAs specifically to have a larger portion of their clients get access to the alternative investment universe. Historically, a lot of these funds were more Reg D, where you have higher accreditation standards, higher minimums and that in some ways was a bit prohibitive for some of the advisors’ clients to gain access to. Now it’s available on Schwab and Fidelity and, candidly, it’s a much easier delivery system for the end-client.
WealthManagement.com: What kinds of returns are you targeting with this fund?
Cory Johnson: We are targeting returns net of fees in the low to mid 9s currently. I do think that will probably get to the high 9s and potentially lower double digits as we get into next year.
WealthManagement.com: You did mention that you are working with RIAs and the Pender press release about the fund mentioned that the minimum investment is $10,000. But you are also working with endowments and foundations. Can you tell me what the breakdown is between those types of investors?
Cory Johnson: Yes. We are still about 80% RIAs, about 7.5% multi-family/single family office and the remaining 12%, give or take, is from endowments/foundations. We currently have an SMA [separately-managed account] with one large endowment, which takes up the majority of that.
WealthManagement.com: Can you tell me more in detail about why you decided to go with an interval fund structure?
Cory Johnson: We ran a Reg D offering for the past eight-plus years. We converted that Reg D offering into the interval fund structure in late April 2023. The real thought process behind that transition was we were trying to make something that was more accessible for the RIAs and all their clients to gain access to an alternative investment such as ours that would provide this type of risk profile, this type of return profile.
When we talked to advisors, they would say, “This is great, but we’ve only got a handful of clients that could potentially work for this because of the accreditation standards and the minimums.” And so doing this, having this as easy as a ticker symbol purchase on a Schwab or Fidelity custodial platforms has really opened up the channels for these advisors to offer this not only to their select clients, but to their broader overall client base.
If you look back historically, it used to be you met an RIA and unless they had a deep research team or a deep operations team, sometimes these alternatives investments, when they were having to track down the documents for this or a signature for this or an ID for this or a trust doc, it became rather cumbersome. And that—in company with the K-1s, for a lot of advisors—that seemed like a lot of work, with the insurance requirements some RIAs have in relation to the Reg D world that they would have to provide.
Now being in an interval fund structure, it’s really alleviated a lot of that operational burden for the advisors. And we are seeing that moving through the due diligence and the research teams much quicker now that we are in [this] structure because I think ultimately, they are not doing it for just a handful of their clients. They are doing it for the majority of their clients. I think the ease of purchase, the ease of getting clients in and out of it, and ultimately it’s still a relatively easy strategy to explain to the end client.
Obviously, alternative investments are becoming more and more popular with RIAs. This seems to be a nice, easy transition piece for them—getting their clients exposure to the space, helping their client base earn more money and further diversify their portfolios.
WealthManagement.com: We are hearing this from a lot of sources, that the RIAs and wealth managers and their clients are becoming more interested in alternatives. But as you are talking to them, how well-educated are they on the benefits of investing in real estate credit? How well do they understand this product type?
Cory Johnson: There are some groups that have a very, very deep understanding of this space and other groups that are in the early stages of understanding, “What are the operatives of the alternatives’ universe, how do we underwrite them from a risk perspective, how do we implement them into a client’s portfolio?"
What we are seeing, one of the tailwinds I think going for us right now, is that anyone basically understands the challenges in the traditional banking world today. And with the understanding that it’s not as easy as it once was to go to your local bank to procure a loan for a real estate asset or even for a home mortgage. They understand that there is an opportunity there, that there’s a large funding void that’s going to be picked up in a very significant portion by private lenders.
So, advisors are understanding the opportunity sets, some of the challenges that are occurring in the marketplaces. Larger institutions are talking about it now, they are upping their allocations into this space because they see the opportunity and, candidly, the water falls down to the RIAs, big and small. As we are seeing more of these educational pieces, and more of this being in the news, they understand and their clients are coming to them wanting to know, “How do we get in?” This interval fund structure is an easier way for clients to gain more access to the space and the client feedback has been very, very positive thus far. So, we are excited about the opportunities we have in that space going forward.
WealthManagement.com: How are you reaching out to RIAs and the wealth advisor space vs. to the larger organizations like endowments? How are you communicating with them?
Cory Johnson: One of the more challenging aspects to the RIA community is they are all kind of on a boat by themselves. They don’t really invest in large groups or packs. So, we have been trying to figure out how do we get this in front of people, how do we educate them on this? We’ve brought on three people in distribution that have backgrounds in distribution into the RIA channel on different product types. We are trying to attain more financial advisor focus, events, more publications, continuing the education process not only on what we do, but the space in general, because the more the understanding and the deeper the knowledge base gets with that, the better chances we have of getting clients into it. And ultimately offering this to a wide range of clients.
Really, we are focused on trying to talk to as many advisors as possible. It’s a lot of work, we are going to have to bring on a few additional people. It’s really a lot of education that has to be done. And when we can get the opportunity to get in front of groups of RIAs, we will definitely try it. Ultimately, I think, with the way we’ve got this delivery system, with the interval fund structure focused on solely this commercial real estate debt with one to three-year terms, I think that’s starting to resonate with people that this is something that they need to take a deeper look at.
There have been more groups that have done a really good job over the last year or two of starting those dialogues in the space and I think it’s a natural transition for us because we had so much in the way of investor interest in our Reg D fund from the RIA channel and now it’s really opening up to more of the RIAs. Now, it’s making a lot more sense, it’s made it a lot easier for us to get more clients.
WealthManagement.com: Can we talk more in-depth about the fund’s investment strategy? You mentioned that you are looking for these smaller mortgages, you are looking in the Sun Belt region. I think the press release mentioned commercial real estate in general, but are you looking in specific sectors? What are the qualities you are looking at?
Cory Johnson: We are a nationwide lender, but we are concentrated in a lot of secondary and tertiary markets. Texas is our largest single market and Southeast is probably second. Those are the areas where we see lot of solid trend growth from the population and workforce and so on, and the demographics make a lot of sense.
Although we do all types of commercial real estate lending, we’ve been hyper-focused over the last couple of years on multifamily, industrial, storage. As the borrowers are coming to us to procure an asset, say they are buying a 200-unit apartment building that maybe needs some rehab work, they are coming to us and we are going to say, “Okay, they are looking to destabilize a portion of this property, fix it up and then restabilize it.” And, ultimately, we want to know who at the end of our two- or three-year loan period is gong to be the logical refinance lender.
In the multifamily, you have the agencies, Fannie, Freddie and HUD, they are remaining active. So that is an area where there is a lot of secondary market liquidity. Industrial, storage, that’s still available. The challenge we’ve got in the some of the marketplaces right now, in hospitality, in retail, obviously in office, is there are just not as many sound secondary refinancing opportunities available. So, while we can easily originate the loans, we are not as comfortable with getting them off our books in a two- or -three-year period. We are kind of on a little bit of a pause on that type of origination currently. But I do believe that we will come back to that.
And that just goes back to the strategy—we’ve always invested with the thought process of principle preservation first, yield generation second. In the market we are in today, we are giving lower loan-to-values to better sponsors on better assets, and we are getting compensated better for it just because of what’s happening in that world from a competition standpoint. As you see those things pile up, it really presents us with nice lending opportunities.
Primarily, our borrowing base are equity funds or single-family offices that have a real estate focus because they are going to be doing more or less repeat business over the years. That’s the kind of sponsorship group we want to deal with on the other side.
Another thing that made us really attractive to RIAs is most RIAs are rather risk-averse and we don’t really utilize a lot of fund-level leverage. We have very limited leverage, really more for cap management purposes vs. yield. And so, what we are doing is senior position loan, we are not levering the vehicle itself. And that allows more protection when markets get in the time of turmoil.
If you look at us and what happened with COVID, we definitely had exposure, but because we had very conservative underwriting going in, we were able to manage through that period of time and still had returns. You see a lot of different debt funds that are out there these days and a lot of them have, both in terms of leverage on them and the rates in the market, it could lead to enhanced volatility.
When we starting originating again in 2021, after COVID, we were heavily focused on multifamily. And we priced a lot of our loans on floating-rate debt, so we’ve done a lot of loans in 2021 that are rolling off, which candidly is what we really want because in the new world that we live in today, we are having these borrowers, these equity funds and single-family offices out there negotiating deals across the board. It’s, “Hey, this deal was previously at $50 million, I am now buying it at $38 million,” and we are basically saying, “Instead of getting 65% or 70% loan-to-value, we will probably give you 55% or maybe 60%.”
And so we are able to kind of reset where our first dollar of exposure would lie, based on the new acquisition prices for these new sponsors coming in. It’s been a nice way for us to reset our first dollar risk downward and get us a bit more protection, while still getting higher returns.
WealthManagement.com: It sounds like your preferred loan-to-value is 55% to 60% right now? Is that correct?
Cory Johnson: Yes, that’s fair. Right now, the weighted average loan-to-value of our portfolio is sub-59%, and I would like to keep that at sub-60% if possible. This gives, again, the downward protection. My job is not to go search for these oversized returns, which most of our investors, being that they are RIAs, they don’t want to go searching for enhanced risk. They want something that’s a little bit more down the middle, where the loan is a little bit more predictable. And we are the first to get paid, we are the last to take a loss in these senior position loans.
WealthManagement.com: Can you give me any details on either deals that you’ve recently completed or deals that you are looking at?
Cory Johnson: Outside of Dallas-Fort Worth, we did an apartment deal, about a $20 million loan, 53% loan-to-value. The property was 90% occupied upon purchase, it was an equity fund, that was their last property in that vintage vehicle. They were selling it to another equity fund that was purchasing it at a little bit of a discount, based on where the current property was. It was basically three properties that they were buying, so we bifurcated it into three small loans, giving these guys enhanced exit opportunities as they were selling out. So, some value-add would be performed on the properties to allow them to exit out. So, that’s a really nice one for us. It’s 53% loan-to-value and we got a very attractive coupon on it as well. Those are the kinds of risk profiles that we are really looking at.
We looked at another industrial portfolio that we are still pricing right now. It’s two age sellers, gentlemen in their late 70s and early 80s, they had basically nine different properties combined. They were a little uncertain about the debt markets, so they said, “Hey, maybe this is time to sell this.” Our buyers, which are a pretty substantial-sized family office, owned about 3.5 million sq. ft. of industrial and about 7,000 parking units and they owned some adjacent units next to one of the owners’ properties. They’ve known them for a long time. Where this deal got really compelling is they negotiated a little bit under price per sq. ft. of what was currently active in the market. The old owners had been clipping coupons for the last 15-plus years. They were basically in the market around $9 a foot modified growth was what they were charging the tenants and the submarket in the area, which has only got about 3% vacancy, is really going between $11 and $12 a foot triple net.
Our buying group, their plan is to go in, ultimately a lot of these leases got shorter terms left on them, so basically either rewrite the leases to $11 to $12 triple net or say, “You can go elsewhere, there’s nowhere in the 50-mile radius where you can go where you are going to be paying $11 to $12 a foot.” So, by the nature of that, we’ve built in a significant amount of equity as we get through this project. That’s the kind of deal we are seeing from our sponsors on the equity side.
That’s the thing. You are seeing that people are having to buy the assets at prices that make sense to carry the higher debt service in today’s world. Being that we can act relatively quickly on these deals, these deals make sense for these buyers to do. Now, whether they are going to sell one or two or all nine of those assets in a two- or three-year period, we’ve basically seen that on a deal like that, they are probably going to sell one or two and they are probably already working with an insurance carrier to provide take-out financing on the remaining portfolio. It’s a nice caveat for us to get in and get a nice very strong sponsorship group with a very nice asset base.
WealthManagement.com: I was also curious because we have seen a lot of real estate credit funds being launched over the past year. Are you seeing a lot of competition in the space where the regional banks usually lend right now? Or do you feel pretty comfortable that’s not a space where most of those funds are going to be playing?
Cory Johnson: You are absolutely right, there are so many debt funds that are surfacing every day. But our historical take has been we don’t want to play necessarily where the larger, more institutional players are at. That is going to be a more defined playing field and when you’ve got $100-million-plus loan, people know where that’s going to go.
We’ve always got more pricing power in the lower middle market. There are a lot of smaller regional players that are in the smaller balance space, sub-$5 million loans. And that is really not our borrower profile.
What we are really seeing right now too is this massive amount of these debt funds. There are a lot of opportunistic debt funds, a lot of mezz, a lot of preferred equity-focused funds that are being raised and put together and they’ve got a different risk profile at the end of the day.
What we are really looking at is, “Hey, at the end of the day, we want to take the lowest amount of risk with the highest amount of return that we can get.” So, although we can do some preferred equity and some mezz, that’s really not our focus. We’ve been around for eight-and-a-half years primarily doing senior position loans and we are going to remain in that lane.
WealthManagement.com: Is there anything about either the market today or the fund itself that you feel is an important piece of what you are trying to achieve?
Cory Johnson: I think it’s really providing opportunities for sponsors to obtain good financing, to capitalize on opportunities that they are seeing in the marketplace, of getting more opportunistic purchases done for them. And ultimately providing our investors with a very nice, stable, low volatility, risk-adjusted return. And I think if we can provide that on both sides.
The lower-middle market of the commercial real estate lending industry, especially on the bridge side, has always been rather fragmented. And now, when you couple it with all the community and the regional banks that have no real indication to do much in the way of new business, it presents groups like us with an unbelievable amount of opportunity to capture best-in-class sponsors with best-in-class assets. We see the next 12 to 24 months, we think there is going to be an abundance of very high-quality funding opportunities for us. Ultimately our goal is to have a very high-performing, diversified portfolio of loans that we are pumping up income for investors from.