H.I.G. Happy In Small-cap Sweet Spot

When investing in value-add properties, H.I.G. Real Estate Partners’ Ira Weidhorn and David Hirschberg say there’s less competition and more stable returns in the $10M to $30M investment range.

No matter how large the fund or the private equity firm, many investors practice specific theses and usually stick to a certain segment of the market, whether that be large cap, middle-market or small cap. For H.I.G. Realty Partners, managing directors David Hirschberg and Ira Weidhorn say that by focusing 100 percent of their efforts in the small-cap space—in the $10M to $30M “equity check” range—they enjoy several advantages over similar-size firms that are going after the biggest and best properties for sale.

“We’re not competing with the large property funds,” says Hirschberg. “We avoid the guys who are trying to invest $75M and $100M of equity in a transaction. We fit into a nice sweet spot.”

That “sweet spot” includes value-add properties that are in need of some tender loving care. The partners say the common thread of every transaction is they all involve some form of improvement, including a simple renovation or a full-scale adaptive reuse to convert an office building for residential use.

“We are very hands-on, active investors,” says Weidhorn. “We strongly believe real estate is a local business, and in every single one of our transactions we invest in conjunction with a local operating partner or developer.”

Parent firm H.I.G. Capital invests in small-cap markets across several strategies for a number of reasons, but where it pertains to real estate, the Hirschberg and Weidhorn say it is the ability to be sector agnostic—jumping between multifamily, medical offices, hospitality, or industrial—that gives them the biggest competitive advantage in the marketplace.

“The ability to jump across sectors helps us find the strongest relative values out there,” Weidhorn says. “But today, at this moment in time, we’re very bullish on three sectors. Hospitality is number one. The second is the medical office sector, and then workforce housing is number three.”

And while accommodations rental website Airbnb has proven to be a disruptor in the hospitality sector, Hirschberg says it the keys to success simply come down to basic fundamentals, like supply and demand.

“What we primarily like about hospitality is we haven’t seen a new influx of supply,” he says. “There are some outliers like New York, and certainly Airbnb has added a new kind of supply in some key markets, but when we evaluate a market opportunity we look at fundamentals, supply and demand, revenue composition, and all of the threats to the business of a single-hospitality asset. We spend a lot of time on due diligence.”