A Recession-Resistant Multifamily Investment Strategy

Lee Rosenthal
President, West Shore
Age: 33
Industry experience: Nine years

By Steve Adams | Banker & Tradesman Staff | Nov 24, 2019

A father-and-son team with deep connections in Boston legal and real estate circles is carving out a niche in the private equity industry as a multifamily investor. Boston-based West Shore specializes in acquisitions of garden-style apartment communities in markets with dramatically lower housing costs than Greater Boston – which could translate into more growth potential.

West Shore Chairman Steve Rosenthal is a former managing partner at the law firm now known as Mintz and a former CEO of developer Northland Investment Corp. His son Lee, a 33-year-old Harvard graduate, worked in acquisitions and financing at Northland before the two founded West Shore in 2016. The firm has raised three private equity funds that have acquired 24 rental properties totaling nearly 6,700 units with an estimated market value of over $1 billion.

Q: What’s West Shore’s investment strategy?

A: To acquire high-quality multifamily assets below replacement cost in certain markets. We’re a big believer in Boston, but with the returns we’re trying to hit, it was most conducive for us to explore the Sunbelt. It’s really a niche strategy: all garden-style multifamily units, and it’s proven to give us some operational advantages versus mid-rise or high-rise properties. Your expense load is lower as well.

The management responsibilities at a garden-style are different, and we manage everything we own.

We’re completely vertically integrated. We’re really fortunate to have a strong acquisition story over the past few years. I started in Florida, having great familiarity there. In my career prior to West Shore, I spend the most time in Austin, Texas and Florida, so naturally those were the first two places I gravitated toward. We thought it would be good to geographically diversity. There are nuances in every market, but also great similarities in culture and rent points. Our average price per unit across the portfolio is about $125,000 to $135,000. The rent-to-income ratios in our portfolio is quite high, which is hopefully a bullish point for the future.

Q: What percentage of your acquisitions are off-market?

A: A lot of it. It’s pounding the pavement, working local contacts in the brokerage community, having direct relationships. There’s multiple sellers where we’ve acquired two or three assets from them. I get a call before it goes out, or it may be a busted marketing process where the asset was sitting out there for several months and it didn’t transact. We often come in second or third [in bidding] and get a call back. Nine out of 10 are off-market, but we’re looking for good value. If there’s a good opportunity, we’re not afraid to go after it, but in this competitive environment, it’s important to make sure those off-market activities exist. Some of the smaller markets may be more fractured in the ownership.

Q: What demographics do you seek in a market?

A: It’s major educational and medical job growth hubs, and population growth. When I say high household income, if our average rents are roughly $1,200 and the average household income is roughly $80,000 throughout the portfolio, there’s a really healthy spread there. That’s a more than a five-to-one rent-to-income ratio and even in a recession or a bad market, everybody needs shelter. We feel pretty protected from the massive fluctuation in the overall economy in America. Everyone is talking about upside and growth, but we feel the cash flows are strong and consistent in the portfolio and the tenant is not recession-proof, but recession-resistant.

Q: How much of the latest fund has been invested so far?

A: Right now we are on West Shore fund III and getting ready to close that down, [and scheduled to acquire] a couple of assets by the end of the year. Next will be fund IV. These are niche funds, $60 million to $75 million, and six to 10 assets. And then we put that in a box and start a new fund. Nothing goes in the fund that we feel doesn’t hit our target.

Q: What’s the profile of your investors?

A: It’s really high–net worth individuals. We have a great team and longstanding relations in the community, and continue to gain traction on the fundraising side as we build that track record and show success and returns on a consistent basis. We co-invest very heavily in all our funds. The general partnership is heavily invested, so these deals have to work on their merits. We’re not in this for the fees. We’re in this to buy good real estate and watch alongside the growth, and benefit mutually.

Q: Does West Shore own any properties in jurisdictions contemplating rent control?

A: Not yet. Particularly in the Southeast, the governments in most of the portfolio would not favor that.

Q: How good is the capital markets climate for acquisitions in West Shore’s niche?

A: That is a strength of the market right now, and asset values continue to rise because of the strength of the capital markets top to bottom. It’s as good a time to borrow as ever. What’s important is to make sure we’re buying strong assets with a strong business plan. Regardless of the conditions in the capital markets, we want all of our deals to work on their merits and not be financially engineered.

Q: What’s your father’s role in the company and how has he influenced your career?

A: Steve is the chairman of West Shore and I couldn’t think of a better partner or mentor. The success of our business is our working relationship, which is completely separate from the familial connection. It really works because he’s such an excellent businessman. He’s so integral in the fundraising efforts, of course, and one of the most prodigious fundraisers I’ve ever come across. People know they can trust him and we’re going to look out for everybody’s best interests. He’s built and grown companies before significantly, and he’s a tremendous asset to consult with as we grow our own operations.

Q: Why doesn’t Greater Boston fit into your investment profile?

A: It’s interesting. There’s a lot of supply up here, and the rents in Boston versus the inner suburbs are astounding, and then you go to the outer suburbs and it’s even more astounding. There’re really three levels of rent. The conventional wisdom out on [Interstate] 495 is that deals pencil to a pricepoint that still seems to be a fraction of what you’re paying in Boston, and a fraction of what you’re paying inside  [Route] 128. The one question is overall demand: is there enough population growth and really job growth to fill another whole wave of supply, like you saw in the mid-2000s. I don’t think it’s impossible, but I’m not sure I would say with conviction there’s tremendous rent growth on 495.

Rosenthal’s Five Favorite Esoteric Lighthouses:
Assateague Lighthouse, Chincoteague, Virginia
Cockspur Island Lighthouse, Tybee Island, Georgia
St. Augustine Lighthouse, St. Augustine, Florida
Block Island North Light, Block Island, Rhode Island
Dyce Head Lighthouse, Castine, Maine

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