By Jon Peterson
New York City-based DRA Advisors has started the marketing process for a new commingled fund that goes by the name of DRA Growth and Income Master Fund XI. The targeted capital raise is $2.25 billion, according to the information stated in a board meeting document for the Pennsylvania Public School Employees’ Retirement System. The pension fund contributed $125 million to the new investment vehicle and is one of its major investors. There is no hard cap on DRA’s fund at this time, which means there is a chance the capital raise could be higher than the projected target figure.
One part of the commingled fund’s investment strategy will be to invest capital in high-quality assets that are located in the suburbs of gateway markets that include both San Francisco and Los Angeles.
DRA over the past few years has been especially active around the San Francisco Bay Area. Some examples of this include investing in an office property in Corte Madera, an industrial asset in Vacaville, a life science project in San Jose and other transactions in places like Santa Clara and Almeda.
The fund manager also plans to invest a portion of the commingled fund in properties located in smaller markets such as Memphis, Raleigh and Minneapolis. The theory behind investing in all of these areas, as stated in the board meeting document, is that DRA faces less competition in these markets, which often equates to market efficiencies and lower purchase prices.
Fund XI is a value-add investment fund. It will be investing in a mixture of assets that will include property types such as residential, industrial, office and retail. The investment plan calls for the manager to capitalize on inefficiencies in the real estate markets to acquire operating assets at a discount to replacement cost.
DRA will be employing several value-add strategies to the portfolio that it puts together for the commingled fund. These will include physical improvements to make properties more marketable and operationally efficient; execution of leasing and operational plans to increase revenues and minimize expenses; focus on downside risks through proactive asset management; utilization of moderate leverage to enhance returns; and optimize capital structures and opportunistic sales as market conditions warrant.
DRA in many cases finds and executes transactions with local brokers and operating partners. To align the commingled fund investors and operating partner interests, key principals of the operating partners are required to contribute significant capital in each investment. This is typically somewhere in the range of five percent to 20 percent of the total equity for each transaction. Should the operating partner produce returns in excess of pre-negotiated return thresholds, the operating partner may receive incentive compensation.