Arnaud Karsenti: betting big on Miami real estate

Timing is everything in real estate.

When Arnaud Karsenti got serious about real estate investing, the South Florida market was in the tank, and buying and selling distressed property was the way to go.

As the market revived, the longtime Miami resident changed tack to focus on new development. But either way, he says, the company’s strategy remains value investing — purchasing at a disciplined price with an eye to finding an opportunity to add value.

Karsenti’s 13th Floor Investments has raised capital through real estate funds. And in recent times, many of his deals are jointly developed with Key International Realty. Those include 400 Sunny Isles and 1010 Brickell, both high-rise condominium projects, and The Harbour, two 26-story condo towers planned for North Miami Beach.

In August, 13th Floor and Key International formed a partnership with the Related Group to acquire a 2.4-acre parcel at 4000 S. Ocean Dr. on the Intracoastal Waterway in Hollywood at a foreclosure auction. The group plans to develop a mixed-use condominium-hotel, with construction starting in the second half of next year.

Karsenti sat down with Business Monday to talk about his business and then answered questions via email.

Q. You have a degree in engineering from Duke and a Harvard MBA. How did you get involved in real estate investment and development?

A: Back in 2003, I was running an entirely different business that was seasonal in nature. Real estate investing became a hobby for me to occupy my downtime and provide supplemental income. Very quickly, however, the tail started to wag the dog and my hobby became the subject of all my professional passion. As the real estate investment business evolved, I realized that my analytical engineering background played a key role in evaluating deal opportunities and making accurate projections to maximize returns to my company and our investors. The problem-solving processes and methods I learned at school are invaluable tools that I use every day. Each day, 13th Floor Investments faces a new puzzle that needs to be solved — and the answer is almost never found in the back of the book.

Q: You focus on value investing. How does that translate into action in South Florida’s real estate market?

A: Value investing is more than a strategy for the 13th Floor team. It’s a non-negotiable way of life. As it relates to our market, value investing translates into acquiring assets that contain more value than the price we pay for them. Many times, this value must be created or unlocked through a workout or development process. But at the core value investing is about creating a big margin of safety between you and the market — seeking the highest and best return while protecting your downside exposure.

Whether we are buying cheap homes in Homestead in 2008 at a fraction of replacement cost or building a high-rise condo in Brickell in 2014 funded with 50 percent buyer deposits, we approach every deal with value investing and safeguarding our investors’ capital in mind.

Q: You have said a key to business is “adapting to stay relevant.” How has that been reflected in your approach to the local market?

A: If you look at our team now compared to five years ago, you can see how we have evolved to adapt to a rapidly changing real estate market. Every team member brings a specific set of skills to help 13th Floor stay relevant and ahead of the market. Our team’s diverse background includes finance, accounting, construction, marketing and architecture. Our ability to stay engaged in all aspects of development and asset management internally is unique among firms our size. These areas of expertise are what enable 13th Floor to be an active and relevant investor, owner, developer and manager of real property throughout Florida.

Q: How are your funds — the Florida Real Estate Value Fund I and Fund II – performing? Do you plan more?

A: Our funds are performing ahead of expectations, both in terms of profitability and timing. We have raised two institutional private equity funds — a $50million vehicle in September 2010 and a $100million vehicle in May 2013. We are currently in the planning stage for our third vehicle. All told, 13th Floor Investments has deployed more than $250million of equity in 29 transactions since 2008. These deals represent a total estimated project value of over $1billion. While not every deal is a home run, we have yet to lose any investor capital since we started the firm.

Q: Your firm is betting big on Miami real estate. What makes you bullish about the outlook?

A: Sunny weather, net positive population growth and an action-packed, volatile market are great ingredients for building a real estate investment and development business. Volatility creates “ups” and “downs” that translate to market dislocations and opportunities for groups like us. Today, one of our favorite strategies is to acquire properties that generate positive cash flow and offer the opportunity for future development. We like to buy properties that can exist as is or become something more valuable depending on where we are in the cycle. This optionality is key when dealing with a volatile market. It’s not about being contrarian but rather being able to properly navigate the rapidly changing tides.

Q: How long do you think Miami’s current building boom will last?

A: Miami is hot, even without Lebron! We are now firmly on the global map and I think we’ll remain a top international destination for investment and business over the long-term. There will be speed bumps along the way, but I find those hiccups to be healthy. Real estate is cyclical and Miami is fortunate that the international market has stepped up while the domestic market gets back on its feet. But I am certain that we will once again get to a point where supply outmatches demand and that certain players will get caught in the mousetraps.

Q: Where do you see 13th Floor Investments heading in the longer term?

A: We will further expand our model to continue investing in and developing real estate across Florida. An important part of our business model is to partner with seasoned real estate developers and investors, and we have enjoyed partnerships with numerous local players, including Key International, Integra Investments, Mast Capital, the Adler Group, Avra Jain and The Related Group.

I see our firm developing a larger roster of joint venture partners over time.

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