Investment Management

December 22, 2023

WDIP Q3 2022 Investment Insights

WDIP Q3 2022 Investment Insights

With Fed hikes, supply chain disruptions, and the possibility of a recession, many investors are wondering if real estate is a solid investment. As we look to an unclear horizon, what is clear is WDIP’s conviction in real estate and, specifically, our portfolios generating attractive, risk- adjusted investments in this inflationary environment. The property owners most exposed in the current environment tend to have one or more of the following characteristics in their investments: (i) high leverage, floating rate bridge debt; (ii) business plans reliant on cap rate compression; (iii) reliance on market rent growth to enhance value vs. rent growth achieved through true hands-on property value creation and alpha execution.

Fortunately, WDIP’s investment philosophy and underwriting criteria has steered us clear from any of the above factors, providing cushion and flexibility to maneuver as needed in creating long-term value.
Our investment philosophy when we acquire a property is to buy at an attractive basis relative to replacement cost and execute a business plan that creates intrinsic value and increases net operating income. When we develop a property, we aim to build to an attractive, stabilized yield-on-cost well above exit cap expectations in macro and micro locations that have strong fundamentals and compelling demand drivers relative to supply. This philosophy serves to protect investor downside while positioning the investments for upside realization. We are focused on generating returns by increasing hard asset values through operations and capital improvements, not by betting on capital market movements or manufacturing returns through unduly high leverage.

Multifamily and Industrial: Solid Investments Despite Economic Headwinds

The near-term economic outlook is opaque, as the effects of the Fed’s rapid rate hikes begin to impact consumer behavior, corporate business decisions, public debt and equity markets, and the greater economy. Over the past year, the Fed has raised interest rates at its fastest pace in decades, with the velocity, severity, and sustainability of future rate increases being unknown. The Fed has indicated that it is willing to do whatever it takes to combat inflation, with rate hikes being the direct result. This is a crude tool designed for demand destruction as a means to combat inflation. However, it does not affect inflationary pressures resulting from structural supply side shortages such as geopolitical strife or global supply chain logjams.

According to the International Monetary Fund (IMF), interest rate changes have their peak effect on growth in about one year, and on inflation in about three years. What this means is that we won’t know if the Fed has tightened too much or not enough until we have an elongated rearview perspective. As it stands, it is more likely than not that the increased interest rates will ultimately lead (if they haven’t already) to a recession. Recession seems to be the lesser evil compared to the potential of an uncontrolled hyper-inflationary spiral which could destroy a currency and an economy.

With market uncertainty, a high inflationary environment, and rising interest rates, multifamily and industrial real estate remain a solid investment sector despite these and other macro-economic headwinds. Although rising interest rates and expanding cap rates are negatively impacting current property values as buyers and sellers engage in market price discovery, the prospect of future value appreciation remains strong, particularly within industrial and multifamily, where WDIP is focused. This can be attributed to solid underlying market fundamentals in these sectors that will see future rental rate growth yield higher net operating income (albeit at a slower pace than the record setting growth experienced during the Covid Pandemic) that may offset and/or exceed the value diminution caused by higher cap rates. While higher cap rates will temper the value growth of rising net operating incomes, moderate cap rate expansion is a fundamental underwriting principal of WDIP and something we have accounted for in building our respective investment portfolios across our various equity strategies.

Important Information: All investments have risk of loss; past performance is not indicative of future results. This letter does not offer or constitute a solicitation or offer to purchase any limited partnership interest, and distribution is limited only to prospective investors with which we have a pre-existing relationship. The opinions and forward-looking statements are that of the author at the time this letter was written and subject to change and market conditions change.

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