EquityMultiple Growth Update – Q3, ’22
2022 has been an eventful year for markets. At EquityMultiple, we are reacting and adjusting while staying true to our fundamental operating philosophies.
This article provides current perspectives on EquityMultiple’s growth in investments, track record, market outlook, and origination philosophy.
First-half KPIs at a glance:
- EquityMultiple saw 38% year-over-year growth in total dollars invested in Q2
- We distributed $70M to our investors in the first half of the year. This represents 225% growth over the first half of 2021. We’re proud of the rapid growth in EquityMultiple distribution volume overall, but this trend really underscores the potential compounding effect of investments in cash-flowing real estate.
- In the second quarter, we were close to our highest volume quarter ever in terms of new investors, at 95% of the prior high water mark.
It has been an interesting few months for self-directed investors, to put it mildly. The news cycle provides a barrage of anxiety: inflation, global instabilities, rising interest rates, and much talk of a recession. Generally, things feel uncertain right now. It’s important to put things in perspective. Recessions are natural parts of economic cycles, and demand dislocation will naturally create opportunity for real estate investors.
At a moment of heightened volatility and prolonged inflation, adding alternatives (private real estate in particular) may be important for your portfolio. Private real estate is uniquely well positioned to potentially be a large part of the upcoming cycle from both a protective and opportunistic standpoint.
Four interlocking factors support this thesis, borne out by historical asset performance data:
- Now might be a critical moment to build on the 60/40 portfolio with alternatives
- Real estate can provide stable, uncorrelated returns amid volatility
- Real estate can provide a hedge against inflation
- Periods of turmoil create opportunities to realize alpha, particularly in inefficient markets (i.e. private real estate)
In the months ahead, as capital markets remain in flux, we will provide further guidance and research related to all four pillars of our thesis. All upcoming investment offerings will also feature details on how the specific asset and investment thesis fit the moment, in line with the above four pillars.
In the meantime, let’s take a look at some recent results.
What has Asset Management Been Up To? Some recent results…
Real estate investments do not bear fruit on their own. The key ingredients of a winning real estate investment are a sound investment thesis, a strong business plan, and skilled management. EquityMultiple seeks opportunities that check all three boxes. Unlike other investment platforms, EquityMultiple takes an active stake in the third pillar — our Asset Management Team — which is tapped in from the investment selection process through exit, working hand-in-glove with sponsors to pursue the best possible outcome for your capital.
In some cases, this will mean connecting sponsors with beneficial third parties to mitigate issues or providing consultation to find attractive financing solutions. In other cases, this will mean finding opportunities to exit investments in a way that achieves attractive returns on behalf of our investors, reducing the risk of long-term negative scenarios, or both.
Our Asset Management Team is in your corner. The EquityMultiple team has grown 50% from June 2021 to June 2022, with asset management as a major focus. This layer of EquityMultiple’s investment platform should provide comfort in all stages of the business cycle, especially during times of heightened volatility and when capital markets are in flux.
To date in 2022, the results tell the story:
- Seven exited investments
- Four preferred equity investments, two debt investments, and one JV equity investment exited
- A 25% dollar-weighted net IRR across these seven exited investments
Over the past calendar year (7/1/21 through 6/30/22) the results tell a similarly strong story:
Across 33 realized investments in H2 2021 and H1 2022:
- A longest investment term of 56 months
- A shortest realized investment term of three months
- A 24% dollar-weighted net annualized return (IRR)
- A median net annualized return of 14.6%
Over half (19 of 33) of these exits yielded a net IRR of between 10% and 20%, an expected result given the preponderance of preferred equity and debt among these exited investments. The aggregate result shows the potential benefit of allocating to higher potential-upside LP equity alongside more insulated capital types.
Let’s take a closer look at the last LP equity investment exited in the first half of 2022:
In June, we exited our Hartford, CT – Last Mile Industrial Facility investment via a buyout from the sponsor. This value-add investment, into a 256,373 square feet industrial property, generated a 55.8% net annualized return (IRR) and a 2.03x net return multiple for our investors over a 19-month investment period. Our Asset Management Team accomplished this result by monitoring a sound business plan, maximizing revenue at our assets, partnering with best-in-class partners, and effective negotiating with the sponsor to execute our investment strategy.
EquityMultiple and our sponsor partner achieved key milestones thanks to a sound business plan, active management, and an effective leasing strategy.
- Property was purchased at a 35% discount to replacement cost;
- Renewed a 124,373 sq. ft. lease and expanded a 22,896 sq. ft. of new space; signed long-term leases to 2031 at higher rents with the anchor tenant, representing 57% of the property’s total rentable sq. ft.;
- Converted 37% of the month-to-month tenancy to long-term leases at higher rents;
- Overall occupancy rate increased from 89% to 95%;
- Gross investor distribution from operating cash flows averaged 9.0%.
Confronting Unforeseen Challenges — a Case Study
Our Asset Management Team also helps in mitigating challenges posed by unforeseen market conditions. This benefit has never been more evident than during the pandemic. Our Williamsburg Mixed-Use preferred equity offering, which was originally closed in early 2019, served as a case study. Our AM Team collaborated closely with the sponsor as they pivoted their business plan in 2020. Collectively, the partnership was able to
- Achieve signing of long-term leases and achieved full occupancy at 100%:
- An A+ credit tenant to occupy all of the office space (which was formerly occupied by a national co-working company dedicated to work and community spaces for women until the pandemic forced them to close this location);
- A neighborhood self-storage company for 100% of the below-grade retail space;
- A regional physical therapy company for 2,500 SF on the ground-floor;
- Secure approval for the Industrial & Commercial Tax Abatement (ICAP) program, a New York City property tax benefit available to newly constructed assets that allow for lower real estate taxes over a 15-25 year period.
- Arrange an exit in June 2022 via sale to a 1031-exchange buyer, generating a deal-level internal rate of return of 12.40% in three years and four months, meeting the original projections of a 11.75% return over a three-year period. The sale price reflected an increase of 12% above the pro forma.
- Successfully negotiate a forbearance agreement and extend the term of the senior loan, providing sufficient time for the Property to recover from the fallout of the pandemic.
When conditions change, our Asset Management Team is ready to work proactively, creatively, and tenaciously to achieve solid outcomes on behalf of our investors.
All told, we ended the first half of the year with upward trends in our most telling aggregate track record figures.
- 18.7% net annualized return across 71 fully realized investments
- 9.96% annualized yield on all investments that have had at least one distribution
- $224M+ in total distributions paid to investors
Notes on our Present Origination Philosophy
New Diversification Options
Diversification not only into alternative investments, but within alternatives, is critical, especially amid capital market fluctuations. We are actively exploring new structures for portfolios and fund offerings to support our investors’ ongoing diversification.
We expect to release one or more such offerings within the coming weeks.
What Can Industrial Do for You?
Industrial assets now make up nearly 10% of the EquityMultiple portfolio; one of our largest asset classes by portfolio share and growing. In addition to the successful exit of the Hartford property (detailed above) EquityMultiple has pursued a number of industrial assets in recent months.
The demand drivers for the asset class are both timely and durable:
- The ever-growing market share of ecommerce. The pandemic accelerated demand for online shopping, and we aren’t going back
- The onshoring of certain manufacturing and supply chain activities as a result of pandemic lessons and geopolitical tensions
- Migratory patterns that support new growth centers — like Atlanta and Houston — where residents will demand more in terms of last-mile fulfillment and rapid ecommerce delivery
Continued Focus on Fixed-Rate Investments
At a moment where inflation continues to threaten real returns and rising rates may challenge bond yields, fixed-rate real estate investments provide an attractive alternative. This holds true for a few reasons:
- For CRE debt financing instruments, inflation serves to increase the value of underlying collateral, potentially making these investments relatively safe.
- Varied hold periods can help to mitigate rate risk and liquidity risk.
- These investments can potentially contribute attractive yield to your portfolio at a moment when inflation challenges the real returns of savings accounts and other fixed-rate instruments
EquityMultiple’s fixed-rate investments include short-term notes, senior debt, subordinate debt, preferred equity, and yield-focused funds. Terms typically range from six months to three years (or longer in the case of funds, but typically with regular distributions and, in some cases, with redemption options).
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of EquityMultiple, are based on current expectations, estimates, opinions and/or beliefs of EquityMultiple. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
This material is confidential and has been prepared solely for the information of the intended recipient and may not be reproduced, distributed, or used for any other purpose or shared with anyone in any form or format. This has been prepared for you by EM Advisor, LLC (“EM”), an SEC registered investment advisor. Information within this report may have been provided by third-parties and, while EM believes this information to be accurate, EM has not independently verified such information. Reference to registration with the Securities and Exchange Commission (“SEC”) does not imply that the SEC has endorsed or approved the qualifications of the firm or its respective representatives to provide any advisory services described on the report or that the Firm has attained a level of skill or training. Investments in securities are not FDIC insured, are not bank guaranteed and may lose value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.
Additionally, investments may not achieve stated social, environmental, or similar objectives. Before investing, consider your investment objectives and EM charges and expenses. EM advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide financial planning with respect to every aspect of a client’s financial situation, they do not incorporate investments that clients hold elsewhere, and they do not provide tax advice. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Nothing in this presentation constitutes an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where EM is not registered.
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