In today’s market, we’re seeing a lot of operators struggle to maintain (or even start) distributions. Rate caps are expiring, debt is coming due, expenses are rising, and many investors are facing reduced returns or even capital calls.
That’s why this email from one of our investors made my day:
“Thoughtful perspective! For operators with whom I’m invested, I’m paying most attention to lender willingness to work with the operators to restructure or extend debt and expiring rate caps without the need for capital calls.
Every real estate deal I’ve invested in, other than yours, has stopped, reduced, or never started making distributions. While that probably reflects poorly on my operator & investment selection, it puts you on the winner’s podium.”
When an investor tells you that you’re the ONLY operator in their portfolio still making distributions in this challenging market, it certainly sets off alarm bells.
Some reasons I believe our deals are currently a bright spot in our investors’ portfolios
Market focus
Northeast = Less volatility
While everyone was fighting over deals in the sunbelt states, we stayed disciplined and focused on the northeast. Why? Because supply-constrained markets like New Hampshire experience significantly less volatility during market corrections.
In high-growth markets like Texas and Florida, development is easy – plenty of land, development-friendly governments, and strong population growth. This leads to constant new supply hitting the market, which puts downward pressure on rents during slowdowns (exactly what we’ve seen recently).
The northeast, particularly New Hampshire (the only state in the region with positive population growth), gives us the perfect combination: growth fundamentals with supply constraints that protect our downside.
Asset class focus
Class B/C value-add = higher cash flow
Another key to our ability to continue making distributions is by focusing on deals that generate sufficient yield on cost that allows us to make distributions. Class B/C value-add properties naturally stabilize to higher yields compared to newer, shinier Class A/B+ properties that trade at compressed cap rates (and oftentimes are financed at neutral, or even negative, leverage).
When you’re buying a Class A property at a 4-5% cap rate, there is no room for execution error, and that’s before you take into account financing the asset with interest rates that exceed the cap rate (negative leverage). With our Class C properties trading at much higher cap rates (and the value that we’re creating through implementing a value-add program), we have more breathing room to absorb market fluctuations while still delivering distributions.
Direct-to-seller acquisition + in-house management = Better execution
Finally, our ability to source deals direct-to-seller (bypassing brokers and competitive bidding) gives us a significant advantage. Our extensive local relationships and direct marketing approach mean we consistently buy at better prices than market averages.
Once we close on a property, our in-house management team executes our business plans with precision (and at a cost that’s discounted to market third-party PM fees), while also providing us more control over the management process than investors who work with third-party property managers.
The proof is in the performance…
When investing passively, operator selection matters more now than it has since we began investing nearly 10 years ago. I’m an LP myself, and I’ve invested in numerous deals with other sponsors who are no longer making distributions (and worse yet, have likely lost 100% of invested capital in the deals I’m invested in).
If you’re an LP who has completely written off passive real estate investing because you invested with some aggressive sponsors that got caught up chasing returns in the “best” markets with cheap financing, I urge you not to throw the baby out with the bath water… There are still plenty of sponsors who are diligently executing deals and delivering compelling risk-adjusted returns.