Cadre Vantage: Quarterly Insights (Q4 2022)
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In our most recent quarterly letter to investors, we reflect on 2022 and remain optimistic about what lies ahead. While the capital markets remain volatile, we are finding opportunities to benefit from dislocations in the broader markets via commercial real estate.
Executive Summary
Cadre continued to build on our compelling track record in 2022, realizing an additional seven transactions. Cadre now has a firmwide realized net IRR up to 27.6%[1] along with a 1.8x net multiple on invested capital.[2]
In Q4, the volatility inherent in stocks and cryptocurrencies took center stage, underlining the benefits of more stable alternatives like real estate.
The long-term nature of real estate investments was also brought front and center when a number of large institutional asset managers, including both Blackstone and Starwood, limited redemptions for lack of liquidity. (Cadre’s investors have the potential to access liquidity via the Cadre Secondary Market[3] on a quarterly basis.)
While the year was hit or miss for many managers, Cadre landed on the “plus” side, nearly doubling our investors’ money in our last exit of the year, the Colorado Springs Office Portfolio.
We have a number of new launches lined up for the first half of 2023, including both individual assets and a new diversified portfolio specifically designed to capture opportunities in our current macro climate. This climate is challenging. Our team is facing these challenges head on. We believe that this climate presents an opportunity to grow, and our focus is on growing the value of our investors’ portfolios.
In December, the Federal Reserve raised interest rates 0.5%[4], their seventh hike for the year. The U.S. central bank indicated that it anticipates more hikes in 2023 as they attempt to bring down inflation, putting the chances of a soft landing in question. The crypto market also saw extreme volatility as several crypto companies folded and equities took investors for a wild ride. This underscores an important point that bears repeating: Real estate is an historically more stable investment than both cryptocurrencies and equities.
Both stocks and bonds had a wild roller-coaster year in 2022. The U.S. bond yield curve ended the year twice inverted, with inversions between both 2-year and 10-year Treasuries, as well as between 3-month and 10-year Treasuries.[5] Stocks are also facing significant headwinds, as all three major indexes, the S&P 500, Nasdaq, and Dow Jones Industrial Average, finished the year down in December.[6] Two of the three, however, were up for Q4—a hopeful harbinger of the new year.
Some investors, understandably, are concerned about Blackstone and Starwood limiting redemption requests in BREIT and SREIT for lack of liquidity. This does not mean real estate investors should worry, particularly those partnered with the right managers. It simply reinforces the fact that real estate is a long-term investment.
Fiduciary duties apply not only to investors seeking to liquidate but also to continuing investors who would be disadvantaged by an immediate sale. As Starwood CEO Barry Sternlich explained: “We can’t liquidate our properties overnight at attractive prices. We have to manage liquidity.”[7]
Overall, the number of redemption requests from investors in leading institutional investment platforms highlighted a key theme in Q4: Liquidity is tight for commercial real estate. Lending institutions are increasingly closing the coffers, cautious about the uncertain economic outlook as well as the implication of rising rates to the value of the underlying collateral.
The Secured Overnight Financing Rate (SOFR) started 2022 at 0.05% and hit 4.30% at the start of 2023.[8] Cadre takes the pricing of debt and resulting cap rate expansion into account in our underwriting. We only bring deals to our platform that we believe will make sense from both an equity and debt perspective.
As investors, we enter the new year with the opportunity to try new things and to reset old expectations. For a long time, many of us have experienced higher-than-usual returns with greater-than-normal liquidity. As much as we’d love to see that continue ad infinitum, it simply can’t always be the case.
Real estate is a long-term investment. The complicated macro climate becomes much simpler when we consider shorter-term changes as part of a longer investment horizon.
We can focus on what we do know, which is that private commercial real estate, selected cautiously and managed judiciously, has a lot to offer investors in any market environment.
Commercial real estate has been proven to help hedge inflation. Adding private real estate[9] to a traditional stock and bond portfolio can generate attractive long-term returns, outpace other sources of income, and help reduce volatility in a larger portfolio. Investors may also have tax advantages available to them.
Cadre has a deep conviction that there are compelling prospects—both relative and absolute—to be pursued in real estate. The beauty of this asset class is that it encompasses a very large macro space with abundant micro opportunities. Our team has decades of commercial real estate investment experience across different market cycles, and we partner with premier local operators who can identify unique opportunities in the present marketplace. We supplement this knowledge with proprietary data science. Our goal is to select assets in high-growth markets with the potential to generate compelling returns for our investors in any market environment.
Learn more about Cadre’s wins in 2022 in our Q4 2022 Quarterly Investor Letter. Sign up for free to access the full letter.
Cadre Updates
Tax-Advantaged IRA Investing
Investors in the Cadre Horizon Fund now have another great way to fund: through their IRAs! Now investors in our core/core-plus diversified fund can add a variety of institutional-quality commercial real estate assets to their retirement portfolio and grow them in a tax-efficient way.
Learn how you can maximize returns and minimize taxes by investing with a self-directed IRA. Reach out to your Investor Relations professional or email [email protected].
Seventh Successful Exit
In Q4, Cadre exited the Colorado Office Portfolio with a 28.1%[11] realized net IRR and 1.8x realized net multiple[12], more than doubling our original underwriting. Our team is pleased to have returned almost twice our investor’s investment dollars with this realization. We look forward to bringing you even more attractive deals in the coming months.
Leveling the Playing Field
Cadre team members spoke with several media outlets in Q4 about the benefits of commercial real estate and how our company is disrupting the industry to help more investors grow their wealth with this essential asset class.
Cadre Founder and Executive Chairman Ryan Williams was declared one of the top 100 People Transforming Business by Business Insider. The publication noted Ryan’s determination to bridge the wealth gap in the U.S. by providing access to real estate to more individuals. He went into detail about Cadre’s corporate mission and successes on CNBC’s Fortt Knox Podcast.
Our CEO, Jared Kaplan, took center stage in Medium’s Authority Magazine, where he discussed purpose-driven businesses and authority and grace in challenging times:
“The pandemic taught me the importance of planning for the unknown. It is important to stay grounded in your original mission and purpose, regardless of the circumstances.”–Jared Kaplan, Cadre CEO
Cadre’s Most Valuable Places to Invest (MVPs) made headlines across our top markets such as Austin, Texas, and via Business Insider. Our Chief Investment Officer discussed our data-science driven approach to market selection on a podcast from AltsDB, the Alternative Investment Database. Cadre’s approach to selecting assets in high-growth markets has proven to be effective, and we look forward to using our latest insights to help source more opportunities for our investors in the new year.
To learn more about what’s trending in commercial real estate, and what’s new at Cadre, sign up for free to read our full Quarterly Investor letter, available only to Cadre members.
- Data as of December 1, 2022 - Realized Net IRR represents the equity-weighted average of the Realized Net IRRs (as defined below) of all realized investments made by investment vehicles advised, managed or sponsored by CCV (i) from inception until the formation of CCV’s Investment Committee on March 31, 2016 and (ii) from March 31, 2016 through the measurement date, which investments were voted on by CCV’s Investment Committee. As such, this net IRR figure represents a composite of prior performance of such realized investments as set forth herein and is included solely for the purpose of illustrating CCV’s experience with acquiring and disposing of real estate assets; however, these performance results do not reflect actual returns that were achieved by Cadre Direct Access Fund LP (CDAF), any Deal by Deal Vehicle (as defined below) or any particular investor. ↩︎
- Data as of December 1, 2022 - Realized Net Equity Multiple represents the weighted average of the Realized Net Equity Multiples (as defined below) of all realized investments made by investment vehicles advised, managed or sponsored by CCV (i) from inception until the formation of CCV’s Investment Committee on March 31, 2016 and (ii) from March 31, 2016 through the measurement date, which investments were voted on by CCV’s Investment Committee. As such, this net equity multiple figure represents a composite of prior performance of such realized investments as set forth herein and is included solely for the purpose of illustrating CCV’s experience with acquiring and disposing of real estate assets; however, these performance results do not reflect actual returns that were achieved by CDAF, any Deal by Deal Vehicle or any particular investor. ↩︎
- The Cadre Secondary Market is NOT a stock exchange or public securities exchange, there is no guarantee of liquidity and no guarantee that the Cadre Secondary Market will continue to operate or remain available to investors. ↩︎
- https://www.axios.com/2022/12/14/fed-raises-rates-half-point ↩︎
- https://www.usbank.com/investing/financial-perspectives/market-news/treasury-yields-invert-as-investors-weigh-risk-of-recession.html ↩︎
- https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html ↩︎
- https://therealdeal.com/2022/12/07/this-isnt-ftx-sternlicht-waves-off-reit-withdrawal-panic/ ↩︎
- https://www.global-rates.com/en/interest-rates/sofr/sofr.aspx ↩︎
- https://cadre.com/insights/how-investors-can-benefit-from-real-estate-2/ ↩︎
- Gross distributions to investors refers to the sum of any income distributions, sales gains, and return of capital without deduction for any investor specific withholding or contribution interest. ↩︎
- Data as of December 1, 2022 - “Realized Net IRR for a realized investment means the compound annual rate of return, calculated on the basis of the actual dates capital contributions (including recycled capital) were due from, and distributions were made to, all of the investors in the relevant Deal by Deal Vehicle (including those who bear reduced management fees and who were admitted to such Deal by Deal Vehicle after its first closing). ↩︎
- Data as of December 1, 2022 - Realized Net Equity Multiple for a realized investment means a net measurement derived by dividing (i) all distributions made by the relevant unblocked single-asset vehicle in which such investment is held (“Deal by Deal Vehicle”) to its investors by (ii) the aggregate amount of capital contributions made by such investors to such Deal by Deal Vehicle (including, for the avoidance of doubt, capital contributions made in respect of management fees and organizational, investment and operating fees, costs or expenses (collectively, “Expenses”)). No investor in any Deal by Deal Vehicle bears carried interest or comparable performance compensation. ↩︎
Disclaimer
Educational Communication
Not AdviceThe views expressed above are presented only for educational and informational purposes and are subject to change in the future. No specific securities or services are being promoted or offered herein.
Not Advice
This communication is not to be construed as investment, tax, or legal advice in relation to the relevant subject matter; investors must seek their own legal or other professional advice.
Performance Not Guaranteed
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance.
Risk of Loss
All securities involve a high degree of risk and may result in partial or total loss of your investment.
Liquidity Not Guaranteed
Investments offered by Cadre are illiquid and there is never any guarantee that you will be able to exit your investments on the Secondary Market or at what price an exit (if any) will be achieved.
Not a Public Exchange
The Cadre Secondary Market is NOT a stock exchange or public securities exchange, there is no guarantee of liquidity and no guarantee that the Cadre Secondary Market will continue to operate or remain available to investors.
Opportunity Zones Disclosure
Any discussion regarding “Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidances, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any, additional guidance, including future legislation, administrative rulings, or court decisions will have and there is risk that any investment marketed as an Opportunity Zone investment will not qualify for, and investors will not realize the benefits they expect from, an Opportunity Zone investment. We also cannot guarantee any specific benefit or outcome of any investment made in reliance upon the above.
Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. Any actual transactions described herein are for illustrative purposes only and, unless otherwise stated in the presentation, are presented as of underwriting and may not be indicative of actual performance. Transactions presented may have been selected based on a number of factors such as asset type, geography, or transaction date, among others. Certain information presented or relied upon in this presentation may have been obtained from third-party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.
No U.S. or foreign securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through us.
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