If we’ve collectively learned anything over the last few weeks it’s that conventional wisdom has its limitations. Hillary Clinton, an overwhelming favorite to win the election according to both pollsters and betting markets, lost. As it was happening, prognosticators and the overnight markets suggested this would have a disastrous impact on the markets. The early movement has been the opposite – in fact, both the Dow and S&P again hit record highs last week. The surge is being driven by the newfound consensus that Trump’s economic policies, particularly tax reform, increased infrastructure spending and deregulation, will help fuel growth and inflation. Collectively, the events of November serve as a warning about the limitations of forecasting. It’s with this backdrop that we consider what lies ahead for the real estate markets in 2017 and beyond.

Howard Marks, Co-Chairman of Oaktree Capital Management, recently wrote:

“I always feel it takes a degree of innate optimism to be a devotee of stocks (with their reliance on conjectural returns awarded by the market) as opposed to bonds (which bring contractual returns guaranteed by their issuers).”

While real estate returns rely on their share of optimistic projections (it’s rare to meet a pessimistic developer), their returns, like bonds, are inherently tied to interest rates and contractually guaranteed payments in the form of leases. Unlike bonds, however, real estate provides a hedge against inflation (and opportunity for appreciation) in the form of rising rents as leases expire. Interests rates look more certain than ever to rise, which will push up cap rates and put downward pressure on pricing. However, as Blackstone’s Global Head of Real Estate, Jonathan Gray, recently pointed out, real estate typically fairs well in higher growth, higher inflation environments because the impact of rising interest rates is more than offset by growth in rents.

In our view it’s too early to follow public market optimism and price in higher growth when evaluating new opportunities. As we look out into 2017, our strategy is to consider the predictable consequences of rising rates by focusing on exit pricing and financing strategy in our underwriting. We’ll also be more  wary  of properties whose values are highly dependent on long term leases without market resets. With the uncertainty caused by shifting fiscal policy creating the further potential for market volatility, we continue to firmly believe that investors will benefit from allocating a portion of their portfolio into real estate, particularly private transactions and funds where they are trading liquidity for stability and the potential for stronger returns.

For EquityMultiple, the year is ending on a high note. Two more of our projects recently went full cycle and provided a full return of principal, plus interest, to investors. We also expect to launch at least two more projects by year’s end. As I mentioned, we’ll provide a deeper look into both 2016 and 2017 at the beginning of next year but, for now, here’s an update on what happened during Q3 and into early Q4.

Transactions 

Q3 continued the momentum we built in Q2, with several deals that launched towards the end of Q2 closing in early Q3. The peak of summer – mid-July to mid-August – found deal activity a bit quieter and was highlighted by a second investment into a multifamily portfolio in Texas (our largest investment to date) and our first ground up construction project – a condo project in Santa Monica. Overall we’re seeing a growth in opportunities, fueled by increasing inbound requests from sponsors and lenders, our partnership with Mission Capital and the hard work of Marious Sjulsen, our Chief Investment Officer, and Jonathan Lesser on the real estate investment team. The pipeline of projects for the end of the year is strong, though our focus will remain on quality over quantity.

Investment Growth

Q3 into early Q4 continued the acceleration of investment through EquityMultiple – total dollars invested have more than doubled since the end of Q2. We plan to continue to expand our tight network of accredited investors and are working on an exciting new membership program to better reward investors for their continued trust in us – whether that’s by referring a friend or colleague or investing in a new deal. Referrals are the ideal way to grow our business and we truly appreciate them.

Investment Performance

While we spend a lot of time working through and diligencing deal projections, ultimately real world performance is what matters. For current investors, you can expect deal specific quarterly updates. This quarter marked a significant uptick in distributions to investors as an increasing number of deals began to produce returns – half of our deals have now made distributions to investors. In fact, we distributed more earnings to investors in October than in all prior months combined. Here are some key stats on overall deal performance across EquityMultiple deals, as of 12/7/2016:

  • Avg. annualized cash-on-cash return for cash-flowing projects: 10.07%*
  • Total Deals: 18
    • Projects live: 2
    • Projects completed (principal returned): 3
    • Projects currently cash-flowing to investors: 5
    • Projects running more than one quarter behind schedule: 1
    • Projects in default: 0
  • Loss of principal: $0

performance-2016

ii

Product Development

Our tech team, led by CTO Peter Shankar, continues to make improvements to the platform, refining existing features and improving the experience for investors. The most exciting change came to the part of the site you see before logging in – we updated this to provide better and more transparent information to both existing and prospective investors. We also rolled out a new documents feature, so you can easily access your deal documents at any time, and a number of smaller features and bug fixes. We have further updates on our roadmap, including seamless IRA investing, improvements to portfolio and deal reporting and a smarter, more efficient investment checkout process. If you have suggestions on improving the platform, please feel free to reach out directly to Peter (peter@equitymultiple.com).

While technology powers our business, we think of ourselves as a real estate company first. That means our focus is on finding good deals and good investors. We’re also committed to transparency and being responsive to investor questions and concerns so please don’t hesitate to reach out.

Happy Investing,

Charles Clinton
Co-Founder & CEO
EQUITYMULTIPLE

 

*Average returns are net of fees and are not weighted. For investments where a higher return is offered for larger investments, the higher return was used.

ii  —  source: http://www.sectorspdr.com/sectorspdr/Pdf/All%20Funds%20Documents/Document%20Resources/10%20Year%20Sector%20Returns

Legal Information and Disclosures
This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice.  EquityMultiple has no duty or obligation to update the information contained herein.  Further, EquityMultiple makes no representation, and it should not be assumed, that past investment performance is an indication of future results.  These materials contain projections and other forward-looking statements. Any statements that are not historical facts are forward-looking statements that involve risks and are inherently uncertain. Moreover, wherever there is the potential for profit there is also the possibility of loss.
This memorandum is being made available for educational purposes only and should not be used for any other purpose.  The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.  Equity Multiple, Inc. (“EquityMultiple”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
This email message is intended only for the recipient to whom it is addressed and may contain information that is privileged and confidential. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have.
EQUITYMULTIPLE does not give investment advice, endorsements, analysis or recommendations with respect to any securities. Nothing contained in this email constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument, which only can be made through official offering documents that contain important information about risks, fees and expenses. Any investment information contained herein has been secured from sources EQUITYMULTIPLE believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor. Securities are offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104. We recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity.
By Charles Clinton
Charles is the CEO & Co-Founder of EquityMultiple. He is responsible for shaping the strategic vision of the company and overseeing its daily operations.
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