This Moment for Investors: How EquityMultiple is Responding

Hello Fellow Investor,

You do not have to be a professional investor to be attuned to what is happening in the market. Pandemic headlines have given way to financial news and the news is generally not good. The S&P is down roughly 16% since the beginning of the year, cryptocurrency has lost two thirds of its peak market cap, and the Federal Reserve is raising interest rates to combat persistent inflation. Taken together, there is now widespread concern we may enter a recession.

Less reported are a set of positive economic indicators, including low unemployment, high household savings and–despite a new peak in June–signals that inflation may begin to wane. The bottom line is the pandemic created a huge range of economic distortions that make historical comparisons more challenging.

In these moments of uncertainty, investors naturally examine their portfolios and think how they can best position themselves to be both protective and opportunistic. In this letter I will articulate how EquityMultiple is considering these questions in hopes that our thinking can be informative to your own.

Broadly speaking, I look to a few principles:

• Portfolios that are diversified with alternatives tend to perform better over time than traditional 60/40 stock/bond portfolios.
• Periods of fluctuating asset prices generally create opportunity for nimble, experienced real estate firms and their investors. As Baron Rothchild famously said, “buy when there’s blood in the streets.” For investors who have been with us for a few years you will recognize that quote – I included it in an investor letter two years ago shortly after the onset of the pandemic.
• The bottom of the market is unknowable, so we believe adjusting how you invest in a given moment is a more practical strategy than trying to time the market.

In April of 2020, when I last issued a letter to our investor community, I noted that “the bottom will create opportunity.” While the circumstances have changed, our focus on due diligence and providing investments with strong risk-adjusted return potential remains the same. This combination of approach and market opportunity paid off for investors. For all investments originated and exited since April of 2020, investors have earned an average net annualized return of over 30%. Looking forward, the opportunity of the present market has the potential to be even stronger.

Why this is a critical time to add alternative assets (and real estate in particular) to a traditional portfolio:

The relationship between stocks and bonds is out of whack

In most years, stocks and bonds bear negative correlation, which is the basis of the traditional 60/40 portfolio model. However, interest rates and bond prices are inversely related, and the correlation between stocks and bonds has flipped into positive territory over the past twelve months as the rate of inflation has grown. Bonds may not serve adequately as a counterweight to stock market volatility in the near term.

Real estate can perform well in inflationary periods

Real estate derives its value from rents. Rents are strongly correlated to inflation so tend to go up in inflation periods. As rents go up, property cash flows improve and so do values. This is backed up by historical data – during periods with available data, private real estate has delivered 5.1% real returns (accounting for inflation) whereas stocks have delivered an aggregate -1.7% real return*.

Illiquid investments can be a port in stormy markets

The value of stocks and bonds are driven by both fundamentals and speculation, the latter of which is heavily impacted by news cycles and investor sentiment. While speculation can impact pricing in any asset, prices in more illiquid markets like real estate move much more slowly, insulating them from daily volatility and partially explaining the low degree of historical correlation with the stock market and the real estate market. There are multiple approaches to investing in illiquid assets like real estate during volatile periods, with shorter term investments (like real estate debt) focused on how you can earn a return even if prices move down and longer term investments (like real estate equity) taking a view on the market that may extend into the next growth cycle.

How is EquityMultiple responding to the shifting market?

Fixed income investments are particularly attractive in the near term.

While many investors look for a higher risk premium in uncertain times (ie, I want a minimum of an 18% return to invest right now), I would encourage you to consider the following. Price volatility makes the equity cushion of debt and preferred equity investments more attractive because the price of a property can go down without impacting your return. Returns on these investments tend to be largely or solely paid currently as income rather than relying on long term capital appreciation. In the public markets, the crash of tech stocks shows investors placing more value on near term cash flow than long term potential. This is a similar concept.

Multifamily and industrial remain compelling but opportunities will emerge in other property types.

Multifamily and industrial properties are still supported by strong fundamentals. Taking multifamily as an example, the US remains undersupplied with housing and rents tend to grow in inflation periods. That said, good fundamentals has heightened demand for these properties, opening up opportunities for other property types to be comparatively undervalued. We recently offered our first hotel investment since the start of the pandemic and will be opportunistic in evaluating sectors that look undervalued.

Diversification matters more than ever.

We will be introducing a range of new diversified products over the next six months, as well as working to keep our minimums for direct investments as low as possible if you prefer to select your investments property by property.

As always, our dedicated Asset Management Team is in your corner, working to achieve the best outcomes for your invested capital. This is a hallmark of our business in all phases of the business cycle, but particularly critical at times like these when we expect fluid market dynamics for some time ahead.

We appreciate you putting your trust in EquityMultiple, and look forward to helping you navigate the months ahead with real estate investments that fit your portfolio during this period of flux.

* Source: KKR, 5/19/22 www.kkr.com/global-perspectives/publications/regime-change-enhancing-the-traditional-portfolio

*Source: Sequoia Capital, 6/14/22 https://www.sequoiacap.com/wp-content/uploads/sites/6/2022/06/Adapting-to-Endure_Sequoia-Capital-2022.pdf

*Source: CAIA, 7/11/22 https://caia.org/blog/2022/07/11/correlation-hidden-risk-your-6040-portfolio

*Source: Columbia Threadneedle Investments, 7/13/22 https://www.columbiathreadneedleus.com/binaries/content/assets/cti-institutional/insights/blogs/how_does_real_estate_perform_in_inflationary_environments.pdf

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 EquityMultiple’s 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.

Certain information contained in this presentation has been obtained from third parties. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of EquityMultiple or its affiliates take any responsibility for such information. Certain information contained in this presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.

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