As a substantial number of people continues to move to growing secondary and tertiary markets, particularly in the American Southeast, they are being followed by commercial real estate investors. Minneapolis-based Timberland Partners is among the firms that are pursuing this strategy.
Next year, Timberland will celebrate its 30th anniversary. The investment firm, which focuses exclusively on the multifamily sector, has found a way to thrive even through the toughest times—the dotcom crash, the Great Financial Crisis and the early days of the COVID-19 pandemic.
Led by Founder and President Bob Fransen, Timberland Partners is a family company. Fransen’s two children serve as executives at the firm, which boasts a portfolio of 85 apartment communities totaling 18,500 units. Spread across 17 states, the portfolio has a value of just over $3 billion.
Earlier this year, Timberland Partners launched its eighth multi-asset real estate fund. The fund, with a target size of $50 million, is aimed at investing in existing multifamily assets in smaller markets that have not been widely explored by larger institutional investors. Most recently, the fund acquired Oak Ridge at Pelham, a 252-unit apartment community in Greenville, S.C. The deal, on a class-B community, not only represents the company’s entrance into the state, but also highlights its focus on secondary and tertiary markets in the Southeast.
This Q&A has been edited for length, style and clarity.
WMRE: What is Timberland Partners’ investment strategy?
Bob Fransen: In my opinion, apartments are the safest sector for real estate investing. We primarily invest in apartment properties where we can create some value through a renovation or improved management or more marketing. We’re looking for properties that provide us with solid cash flows and the ability to build wealth over time. Our portfolio is mostly class-B, with some class-A-. We try to be ambitious and aggressive in our acquisitions, which means that we go beyond major markets into secondary and tertiary markets. We think those markets are overlooked. We’re very comfortable with them and think concerns about being able to exit those markets are overstated risks.
That’s not to say that we invest exclusively in secondary and tertiary markets. We’re looking for markets where we see major population and employment growth trends. That’s why we’re active in the Southeastern part of the country. To give you a baseball analogy, we want good solid contact. We’re hitting singles and doubles. We’re not swinging for the fences. It’s not a high-risk strategy. It results in few, if any, strikeouts.
WMRE: What was Timberland Partners’ original vision and mission? Has that changed over time?
Bob Fransen: It has evolved over time. I came from an apartment brokerage background, and when I started Timberland Partners in 1992, the vision was for it to be a personal investment vehicle. When I decided to really build the company and move out of brokerage, we became a company to help other people invest in real estate. Early on, we acquired all types of commercial property, but because of my background in apartments, I decided that we’d become an apartment company. I felt specialization was important, and investors liked it. We started out investing in the Twin Cities and grew our footprint to 17 states.
WMRE: What type of investors does Timberland Partners target? Do you anticipate your investor base will change in the near future?
Bob Fransen: We started out targeting high-income earning individuals and then expanded to high-net worth individuals that write out seven figure checks—a lot of business owners and real estate professionals who don’t want to manage their own real estate investments. Our investor base continues to grow. We have a pool of 800 investors, with 80 to 90 percent from word of mouth and referrals. And for the past three or four years, we’ve been making inroads with family offices and private wealth managers. Our investors are almost entirely domestic, and our funds are for accredited investors.
WMRE: How does Timberland Partners raise equity and attract new investors? What kind of investor outreach do you conduct?
Bob Fransen: We’ve been raising funds for 12 years now. We formed our seventh apartment fund roughly two years ago. It was supposed to be $100 million, but we stopped it at $80 million because of COVID. We just weren’t sure we’d be able to acquire properties. But when we realized there were some COVID-related opportunities, we put together a $58-million fund to take advantage of them. So far this year, we’ve acquired five properties in the Southeast and another one is scheduled to close in mid-October.
WMRE: How does the firm communicate and keep the conversation going with its existing investors?
Bob Fransen: We like to say that we’re in the business of helping people invest in real estate. While a lot of folks look at investors as a necessary evil, we made the decision to serve and embrace our investors.
Since the beginning, we think we’ve communicated very well with them. It’s one of our guiding principles—building and maintaining very strong relationships. We have four people on our IR team who are solely dedicated to providing service to our investors. We have quarterly reporting, newsletters and an annual investor meeting. Two years ago, in an effort to provide more transparency, we made the decision to move to Juniper Square’s investor portal to give our investors a way to track their investment performance.
WMRE: What is the range of returns that you expect on your investments?
Bob Fransen: Our projected returns are lower than they have been historically. We project a 7 percent cash-on-cash return or dividend to the investors. As we create value, that increases to low to mid-teens IRR over the 10-year hold.
WMRE: What is your average hold period?
Bob Fransen: Ten years, typically with 10-year financing from Fannie Mae and Freddie Mac. At the end of that hold period, we talk to our investors to see what they have to say. We either sell and exchange into a new property or hold and refi. Most of our investors prefer refi. We do have the ability to liquidate if necessary and offer investors the ability to exit funds at fair market value. It’s rare that people want out though.
WMRE: What differentiates Timberland Partners from other investment firms?
Bob Fransen: Timberland Partners is a family business. Both my son and my daughter are involved after working elsewhere. My son, Matt, is our chief investment officer. He spent several years at AIMCO in Denver. My daughter Erin is our chief operating officer. Being a family company shows that Timberland Partners is going to be here long beyond my time, and it also helps us have a long-term approach for investments. And it’s good from a business perspective because the three of us are in alignment on what we want to accomplish and what we want our business to look like. Another differentiator is that I’m not only the founder and principal of Timberland Partners, I’m also the largest investor in every fund. I usually put in a few million, side-by-side with our investors. And we manage everything that we own. We don’t outsource to a third-party management firm. We view property management as a way to control our investment; we’re not trying to create another profit center with our property management.
WMRE: How has the pandemic impacted your investment strategy, as well as your existing portfolio, and your relationship with investors?
Bob Fransen: The first thing we did [after the lockdown started] was look at every asset in our portfolio to see what would happen if we lost 20 percent of our revenue. (Most properties are breaking even at 70 percent occupancy). Six properties fell into the danger zone. We informed our investors and communicated with them weekly. Our acquisitions went on a brief pause, probably about three months, because we wanted clarity. Then we saw that our residents were paying their rent, and we weren’t losing 20 percent of revenue, maybe just 1 percent. And people quit moving too, so we didn’t have turnover costs. We got to thinking that maybe there are going to be some folks out there that might be nervous and want to sell. We did 11 deals last year, including our first in Huntsville, Ala., that we bought from a New York-based group that wanted to exit because of the pandemic. That property is outperforming our initial projections. In fact, all the deals we acquired in 2020 are up significantly in value since last year.
WMRE: The multifamily sector is one of the hottest and most competitive property sectors today. How is Timberland Partners facing competing buyers and coming out on top?
Bob Fransen: Because I’m a former broker with CBRE, I understand things from a brokerage perspective. The company has used my background to create really solid relationships with the brokerage community. We have worked hard to build those relationships because, at the end of the day, other groups are looking to acquire the same property, and the seller is relying on guidance from the broker to pick a buyer. We do our best to be very easy to do business with and do what we say we’re going to do. We’re very cautious not to pursue a deal that we’re unsure of. Once we bid on a property that is for sale, we close on it—we don’t back trade. That puts us in a position to win deals because we’re often approached by brokers and owners that are looking for [someone who can close]. We’re working on a transaction right now with an owner that didn’t want to take a property through the full marketing process and wanted to work with only a handful of potential buyers.
WMRE: What plans do you have for Timberland Partners in the new year?
Bob Fransen: Our plan for a couple of years now has been to grow at an average rate of 12 percent annually (per number of apartment units). That means we need to acquire 2,200 to 2,300 units next year, assuming we don’t sell anything. At that rate, we’re going to have to buy nine apartment communities. We think that growth is enough to be somewhat aggressive, but not so much that we can’t maintain control on the operations side. It energizes the team, but also requires some discipline. We plan to primarily grow in existing markets or those that are in close proximity to our existing markets.
We started our development arm about six years ago, and so far, we’ve completed four projects, all in the Twin Cities. In doing that, we found that it’s hard to build scale locally, so we’re looking at developing our rental townhome prototype under our Sundance brand in various suburban markets. We recently completed our first one in suburban St. Paul. We have purchase agreements for land in a far suburb of Dallas and a site in Omaha. Based on the quick lease-up of Sundance in St. Paul, what we think residents are looking for, and the lack of affordability of home ownership, we feel quite confident this is going to be worth the effort.
WMRE: What is the biggest success that the company has experienced? What is the biggest failure?
Bob Fransen: No investor has ever lost money with us, and we’ve never been late on a mortgage payment. We’ve had the good fortune of having the wind at our back most of the time since the beginning. We had some headwinds in 2001, and then again from 2008 to 2010. That’s when we put our first fund together. It took us a long time to get that money invested because we didn’t know where the bottom was. But then we started acquiring foreclosures.
As far as our biggest failure—it was more a learning experience. In the early 2000s, when we went into Texas, we were a sleepy Minneapolis firm, and we had to learn how to do business with the big boys. They were sophisticated beyond our level, and we struggled. We had to get better and learn to compete. It was an awakening.