Cadre Vantage: Quarterly Insights (Q1 2022)

Executive Summary

• As uncertainty undermines the financial markets, investors are searching for more stability in less volatile assets like commercial real estate.
• The Federal Reserve’s rate increases totaling 0.75% and temporarily inverted yield curve are concerning many who have invested in traditional assets. The effect on commercial real estate investors, however, will likely be more muted.

Investing through uncertainty

This past quarter marked the two-year anniversary of the pandemic’s arrival in the U.S., and there is still much we don’t know about its full-blown effects. We haven’t witnessed the long-awaited wave of distressed asset sales. The multifamily and industrial sectors have been red hot, while other sectors are starting to feel some pressure with recent reappraisals that have led to lower market values. Property owners who are not currently in a stressed position are holding on to properties and, as such, have not needed to declare losses. For those that have hit the market, we believe a “wait-and-see” approach is best.

From a macroeconomic perspective, stability is increasingly difficult for investors to find in public markets. Stocks and bonds have been subject to rapid market movements and the ill effects of increasing inflation. Price increases are not new this quarter, but recent global conflict is also taking a toll. Notably, gas prices reached a record high this quarter. As previously signaled, the Federal Reserve raised interest rates 0.25% in mid-March and an additional 0.5% in early May to help counteract such rising costs.

Investors are now keeping a close eye on yield curves. As an indicator of market sentiment, the 10-year U.S. Treasury yield is giving recession-watchers a jolt. One of the most watched yield curve measures is called the 10-2 Year Treasury Yield Spread, which measures the difference between the 10-year treasury rate and the 2-year treasury rate. After steadily falling throughout the first three months of the year, the 10-year Treasury finally closed -0.06% below the 2-year rate on April 1.

When the interest rate on the shorter end of the yield curve (2-year) is higher than the longer end (10-year), it is called an inverted yield curve.

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With so much uncertainty in the market, investors are exploring real estate investing as a way to counter daily volatility. As Cadre’s asset allocation study showed, commercial real estate (CRE) can be an attractive addition to a larger portfolio, potentially offering stable income streams, diversification benefits, and reduced volatility. CRE may also serve as an effective hedge against rising inflation.

How Cadre helps preserve your investments

As cap rates and the 10-year Treasury rate converge, we are working tirelessly at Cadre to help our investors receive excellent value for their investments. We take a realistic view of revenue expectations and expense growth through our disciplined due diligence. Low cap rates require additional caution to ensure each investment is fully supported by fundamentals.

Discretion has served us well since we opened our doors in 2014. We believe investment managers should be prudent, both from a macro and micro perspective. As a result, our underwritten IRR is never a best-case scenario.

Cadre’s return expectations are primarily alpha-based. We seek to earn profits for our investors through excess returns, focusing on market selection and value creation. Our value-add commercial real estate investments are geared toward renovation and repositioning, with the goal of reducing operating costs through operational improvements.

Market selection is a true differentiator for Cadre. Proprietary data science supports our experienced team’s search for assets located in markets poised for growth. We target geographic locations that we believe show the strongest potential for risk-adjusted returns: the Cadre 15. Then we narrow our focus to specific property types in micro-locations.

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Cadre’s disciplined investment process helps us continue to source deals across asset classes, markets, and vintages, which we believe will provide investors with attractive opportunities for price appreciation—no matter what the investment climate brings our way.

What property types are on our radar? Learn what’s trending in commercial real estate in the full Quarterly Investor Letter, accessible to Cadre members. Sign up for free.

Exciting additions to the Cadre team

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This past quarter, Cadre welcomed two new key senior executive hires. Dustin Cohn joined as Chief Marketing Officer, and Skand Gupta joined as Head of Engineering. These two leaders will drive the growth of Cadre’s individual investor base by expanding our distribution reach and technology capabilities to further enhance our customers’ investing experience.

Successful recent deal exits

Cadre successfully realized its eighth and ninth deals at the end of March, exiting Lodge at Copperfield, a 330-unit multifamily asset located in Houston, TX, and Lincoln Place, a 240-unit multifamily asset located in Sacramento, CA.

The sale of Cadre’s Lincoln Place property is now targeting (based on sales proceeds) a ~22% net IRR and 1.9x multiple on invested capital, more than doubling the underwritten targets for the asset’s net IRR.

The sale of the Lodge at Copperfield property is now targeting (based on sales proceeds) a ~21.8% net IRR and ~1.9x multiple on invested capital, nearly doubling the targeted net IRR underwritten for the deal.

Become a Cadre member to access our full Q1 Cadre Vantage publication and future quarterly updates.

The invasion of Ukraine is one of the largest military escalations in decades. We’re devastated for all the innocent people who are currently suffering and for any members of our Cadre community–both former and present–and their loved ones who come from or are connected to those communities.

The impact of major events in the world such as this one reaches far beyond borders and can affect all of us mentally, emotionally, and physically. As I’ve shared before, one of my greatest hopes is that we can all continue to speak up when we see injustice and support each other. I am proud to be part of a community that consistently shows up for one another through both good times and bad.

–Ryan Williams

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IRR calculation represents an equity weighted average annualized internal rate of return (IRR) for realized real estate investments of offerings by Cadre since the formation of our Investment Committee through to the date of calculation, after deduction of fees and expenses. Equity multiple represents the investment multiple on equity, which is calculated by dividing the aggregate realized proceeds for the applicable investment after deduction of fees and expenses. For recently realized investments, an estimate of proceeds to vehicles managed by Cadre may be used. The use of a different methodology may result in a materially different return metric.