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CONTI's Pioneer Hill in northeast Austin

How One CRE Fund Manager Is Shifting Its Investment Strategy with Its Fourth Fund

CONTI Capital decided that investing in older workforce housing and value-add properties was not a sustainable strategy.

Carlos Vaz moved to the U.S. from his homeland of Brazil in 1999 for an unpaid law internship in Boston. He had $300 in his pocket—far less than his monthly rent—and while it wasn’t funny at the time, he now jokes that his P&L was negative.

Vaz, firm in his belief that the U.S. was a “blessed country,” was confident that the sky was the limit, as long as he worked hard, followed the law and did his best. In his case, he turned out to be right.

Today, Vaz serves as CEO of CONTI Capital, a real estate investment firm that employs 250 people and has a portfolio of roughly 15,000 multifamily units totaling just over $1 billion assets under management. The Dallas-based company has two divisions: a vertically integrated real estate division to manage the firm’s multifamily portfolio and a credit division that invests in first lien positions and mezzanine debt.

Vaz launched CONTI Capital in 2008 after founding two successful companies in Boston: CONTI Construction and CONTI Group, which bought and flipped homes. He managed to exit the residential business right before the housing bust, abandoning snowy Boston for sweltering Dallas in 2007 with an eye toward owning multifamily properties in a growing market.

Under Vaz’s leadership, CONTI has launched four multifamily investment funds. The most recent, CONTI RE High-Growth Fund IV, made its first acquisition earlier this week: a 300-unit new construction asset in northeast Austin dubbed Pioneer Hill which was completed in 2021. WMRE talked to Vas about how this new fund differs from the firm’s previous ones and why becoming an RIA is in the plans for the firm’s future.

This Q&A has been edited for length, style and clarity.

WMRE: What is CONTI Capital’s investment strategy?

Carlos-Vaz.jpgCarlos Vaz: One of our core values is adaptability, and our investment strategy has recently shifted. Previously, we invested in older workforce housing and value-add multifamily in Texas. Now, we’re investing in newer multifamily properties with a value-add component, because there’s always some way to add value, whether it’s through management or something else. We’re still investing in Texas, mostly in the four larger markets (Austin, Dallas-Fort Worth, Houston and San Antonio). We also like Atlanta, Orlando, Nashville, Tampa and the Carolinas.

We determined that investing in older workforce housing and value-add was not a sustainable strategy. There’s cap rate inversion today—B and C properties are trading at lower cap rates than newer A properties. It’s like this: I’m going to buy a 1970 Toyota Corolla and pay more for it than a 2021 Toyota Corolla. That’s the stuff that makes me very concerned.

It’s never an emotional decision. It’s based on data, and the data was telling us that there’s a lot of risk to continuing to own those older assets.

We’re buyers and sellers today. We currently have 16 deals at the title company that we’re selling from our first and second funds. Those are older assets built in the 1970s to 1980s.

WMRE: CONTI recently launched CONTI RE High-Growth Fund IV. How does it differ from earlier funds?

Carlos Vaz: Fund I and Fund II were workforce housing with median household income of $50,000 within a three-mile radius and leverage of 70 to 75 percent. With Fund III, we continued to invest in the same property types and markets, but brought leverage down to 65 percent and looked for newer assets. Fund III was the hybrid fund that combined elements of the first two funds and moved us toward the fourth fund. Our earlier funds invested only in Texas.

There are a couple of reasons for the shift from older workforce housing to newer market-rate housing for Fund IV. Our research shows that the person making $50,000 is struggling a little more with inflation, so it was important to have a different tenant profile. Additionally, property insurance for older assets increases significantly, as much as 30 to 40 percent, and our CapEx was going up tremendously at our older properties.

Fund IV will be $150 million to $250 million and will invest in core multifamily assets of 2010 and newer vintage with median household income of $80,000 to $150,000 in a three-mile radius. This fund will have 65 percent leverage or lower and more geographic diversification—the Sunbelt markets mentioned earlier, instead of just Texas. That diversification is important to our investors.

Fund IV will seek a 10 to14 percent ROI with a three- to five-year hold period. We’ve already acquired one property for the fund and have seven other assets identified by April 2022. We expect it will acquire a total of eight assets. The first asset of Fund IV is a newly constructed asset which was built in 2021, and we took it over at the end of its lease-up stage. New development is also a component of Fund IV, in which we would partner with top developers during the later stage of the project. We would not be part of the land investment strategy.

WMRE: How has CONTI Capital evolved since it first launched?

Carlos Vaz: When you go on an entrepreneurial journey, there are a lot of changes. In the beginning, it’s about survival and raising money. When we bought our first property in March 2008, we had one investor—we were 1 percent of the partnership and the investor was 99 percent. We learned a lot from that.

As we began to understand the business more, we attracted more investors, and bought more properties. With more investors, and different types of investors, our vision changed, and we launched our first fund.

Additional growth meant more change: we brought KPMG in as an auditor, created a board of advisors and put more systems and processes in place so we could continue to grow.

WMRE: Speaking of investors, what type of investors does CONTI Capital target? Do you anticipate your investor base will change in the near future?

Carlos Vaz: We invest capital on behalf of individuals, wealth managers and institutions. In the beginning, when we were writing $4 million and $5 million equity checks, we were raising money for each deal and mostly from individuals. We had a $50,000 minimum investment from accredited investors.

As we grew and added more governance, wealth managers and family offices wanted to invest. And now, we have institutional investors, including a European bank. It took three years of due diligence, but there’s something to be said for persistence.

Our minimum investment today is $250,000, with many investors putting in $500,000 or more. Our reinvestment ratio is over 90 percent.

Our investor base is split 50/50 between domestic and international investors. We have investors from Europe, Latin America and Asia.

WMRE: How does CONTI Capital raise equity and attract new investors, especially international investors?

Carlos Vaz: One thing about equity is that it’s never easy to raise. There’s nothing better than word of mouth.

I’m still involved in raising equity. I’m one of those guys with over 2 million airline miles.

We believe in local networks and having a local presence in order to better serve our clients. We have an international footprint with offices in Dallas, Miami, New York and São Paulo, Brazil. We’ll be opening an office in London soon. An office in Asia is not part of our plan for 2022.

We’ve grown our base of international investors by developing networks. I was born in Brazil, and [that’s helped with expanding our network] there. Most of our international investors are wealthy individuals.

We are spending the time getting to know people. Ultimately, people are going to do business with people they trust and like. Once that’s in place, then we can talk about money.

WMRE: What is your vision for CONTI in 2022?

Carlos Vaz: There’s a saying that if you don’t know your destination, any wind is favorable. For us to continue to grow, it’s important for us to have a clear vision of where we want to go and a plan for how we can get there. Not just for this year, but for several years. Our 10-year vision for the company is to be $10 billion AUM.

We’re writing $31 million equity checks now, and we need to raise equity differently than we did in the beginning. For 2022, the most important thing for us is to finalize our RIA. We’re hoping that will happen in the next six months.

Being an RIA will allow us to deeply develop our U.S. investor base and attract investors on a much bigger scale. We will be able to tap into different family offices and find additional channels to distribute our funds.

We started thinking about becoming an RIA about two years ago, after our KPMG advisors brought it up. That same week, I talked to a wealth manager and a family office that said they didn’t do business with anyone who wasn’t an RIA.

Thinking about our 10-year vision, becoming an RIA was more a matter of when, not if. And when we decided to move forward with that, we relied on our CFO, who had previous experience as a chief compliance officer with an RIA.

WMRE: How does CONTI communicate and keep the conversation going with its existing investors?

Carlos Vaz: Investor communication is really important to us, and investor engagement is crucial as well. It is our job is to show our investors that we care for their money as if it were our own money. It’s very important to show that alignment.

We have an IR team to stay in touch with investors and an investor portal to provide full transparency. We release a quarterly report and host an annual investor summit. We’re going to be the ones calling investors to make sure they received their distribution instead of investors having to call and ask about it. And even though I’m the CEO, I’m always available if investors want to talk with me. We want investors to know, regardless of how much money they invest, we’re going to treat them all the same.

WMRE: What is the most common way that you structure deals?

Carlos Vaz: LPs. And I want to point out that I’m investing in every fund alongside our investors to show that alignment of interest. For every investment CONTI makes, it has my personal signature.

WMRE: What is the range of returns that you expect on your investments?

Carlos Vaz: Historically, we’ve produced yields to investors of 17.2 percent. We sold a deal today that gave investors a 5x return.

WMRE: What is your average hold period?

Carlos Vaz: Five years, but we’re currently selling some of our assets at three years. The average hold period for our completed dispositions is 4.8 years. The average IRR for completed dispositions is in the 16 to 17 percent range.

WMRE: A lot of multifamily investors describe themselves as “data-driven” but CONTI has taken that concept to a new level. Can you tell us about the importance of data analytics for the firm?

Carlos Vaz: On an annual basis, CONTI spends roughly mid-six figures on data, research and data analytics. We have an in-house research team with three people, including an economist. That team has developed a proprietary market evaluation tool that analyzes dozens of weighted indicators called The CONTI Index.

The Index is an invaluable tool. It gives us much more depth of information, and in combination with our team and investment committee, allows us to find better deals and avoid bad ones. It also helps our asset management team.

We decided to create The CONTI Index so we could include more than one source of data. The Index combines data from multiple sources. Using the Index, we ranked Austin as number one for the top 10 multifamily markets for investment in 2022.

Access to data is priceless. But access to the right data is a financial coup. If you have the right data, you can empower people to make the right decisions and save time. It allows you to see things that no one else is seeing out there.

For example, last week we were looking at a property [for acquisition]. We threw it on our index, and in two minutes, we killed the deal. Just think of how much time we saved.

On the other the other hand, five other deals were available. We threw them on the index too, and boom! We knew we wanted to go after them.

Data has one function—to validate our decisions. Data is the car; our people are the drivers.

WMRE: The multifamily sector is one of the hottest and most competitive asset classes today. How is CONTI Capital facing its competition and trying to come out on top?

Carlos Vaz: It’s not easy to find deals, but that is our business—that’s what we do. We have the experience, relationships, execution and performance. And we have the money.

Our data allows us to move extremely fast. We can put a deal under contract, finalize all the due diligence, go in with earnest money and close in less than 30 days. Our data tells us what we can buy a property for, and if it passes our investment committee, we can put in a lot of earnest money. We can close in cash if necessary, and we’ve worked with our bank for 11 years.

All of that is a huge advantage over competing buyers.

WMRE: What is the biggest success that the company has experienced? What is the biggest failure?

Carlos Vaz: The biggest failure occurred very early in our journey. We didn’t have the systems in place that we have today, and we bought a property for 20 percent of the note. I thought, “What can go wrong?” Well, I could write a book on all the things that went wrong.

I thought I was the smartest guy in the room, and I learned hard lessons with that deal: you can never fix location; there’s a reason why no one else is buying; and there’s a reason why it’s being sold so cheaply.  The investment didn’t lose money, but we had to go above and beyond to make sure it didn’t.

Our biggest success is our company culture. That is what allows us to deliver these returns to our investors and allows us to grow.

When there’s a founder presence (like me), there’s a need to make it bigger than myself. My approach is different: How can we work together to build something people really enjoy and something that produces results?

There’s something I say all the time: I’m not here to split the pie. I don’t like to split the pie. Let’s build a pie factory instead.

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