[Editor's Note: The vast majority of the world’s millionaires have created wealth by investing in real estate. The White Coat Investor wants to show you how that’s possible for you. That’s why we created the free Real Estate Masterclass, where you’ll receive a series of videos that will walk you through three of the most important real estate subjects. And it won’t cost you a dime! Get started with the Real Estate Masterclass today and begin building your wealth in an entirely new way.]
By Dr. James M. Dahle, WCI Founder
It's been a while since we updated you on the performance of our portfolio. Long-time readers will recall we first added private real estate to our portfolio in 2012, and then, we more earnestly continued in 2014. At that time, we underwent some direct real estate investing from our accidental landlord situation, but we finally sold that property in 2015. We now have only passive real estate investments.
Here's where things stood after 2022.
Our Portfolio
As a reminder, our asset allocation consists of:
60% stocks, 20% bonds, and 20% real estate
In detail, it looks like this:
60% stocks:
- 25% Total Stock Market Index Fund
- 15% Small Value Index Fund
- 15% Total International Stock Market Fund
- 5% Small International Stock Market Index Fund
20% bonds:
- 10% Nominal bonds
- 10% Inflation-protected bonds
20% real estate
- 5% Publicly traded REITs
- 10% Private equity real estate
- 5% Private debt real estate
Stock and Bond Performance in 2022
Before we get into the real estate numbers, let's first discuss how our stocks and bonds performed. The numbers reported are our actual return numbers, verified using the XIRR function. Our numbers may be slightly better or worse than the fund numbers due to cash flows in and out of the investment. Also, we don't consider a tax-loss harvesting transaction to be a withdrawal from that asset class, so the returns are often a mix of two tax-loss harvesting partners. We're also only considering money we have designated for retirement, whether that's in a taxable account or a retirement account. We're not counting UTMAs, 529s, our kids' Roth IRAs, HSA, cash reserves, small businesses, etc. It also ignores a small cash balance plan (which returned -15.38% in 2022.) Here's how we did in 2022 overall:
- Overall Portfolio Return: -9.92%
- Total Stock Market: -16.38%
- Small Value Stocks: -5.10%
- Total International Stock Market: -15.66%
- Small International Stocks: -17.38%
- TSP G Fund: 2.98%
- Municipal Bonds: -7.09%
- TIPS: -11.66% on our fund, 2.39% on a small amount of individual TIPS bought at the end of the year
- I Bonds: 5.45%
2022 was a bad year for stocks and a disaster for bonds. I was actually pretty pleased with how my bonds did compared to many common bond holdings. How did real estate, especially private real estate, do in comparison?
More information here:
The Nuts and Bolts of Investing
2022 Real Estate Performance
Let's go through each of our real estate investments and how they did in 2022.
Publicly Traded REITs – 5% of Portfolio
Our first real estate investment and the one we have held the longest (since 2007) is the Vanguard Real Estate Index Fund, available in both traditional mutual fund and ETF flavors. We use both, depending on the account it is held in. 2022 was a bad year for publicly traded REITs. They tend to have moderate correlation with the stock market, so the poor performance in an overall market downturn was not a huge surprise. Our return in this asset class for 2022 was -23.31%. While that looks terrible, it was actually a little better than the fund return of -26.24%. That's just due to the fact that we were adding money to it as the year went on and because later dollars missed out on some of the losses. The same thing happens in reverse in good years. Overall since 2007, our return in this investment has been 5.50% per year. The 2022 and 2023 returns (this post was written on Feb 11, 2023, to be published in March) really brought that average down sharply as we have been adding quite a bit to this in 2022 and 2023. A year ago, the long-term average was closer to 12%.
Private Equity Real Estate – 10% of Portfolio
As a general rule, our private real estate creamed our public real estate in 2022. Whether that is due to the lower correlation with stocks, superior manager skill, or the fact that it is not marked to market as quickly is not clear. But either way, we'll take it. Our overall return for private equity real estate was 8.84% in 2022. Yes, that's a positive 8.84%. Long-term return is hard to say because we used to include some small businesses in this category that really did great. But since we separated those out on our spreadsheet after 2019, returns have been 8.07% 10.83% (see the italicized note below). These returns are somewhat inaccurate, though, as many of these investments are not marked to market each year. That causes returns to be understated in good years and long-term and perhaps overstated in bad years. You can really only judge the return of closed-end funds and syndications AFTER they go completely round trip, and that is often a 5-10 year process. Let's talk about each investment individually.
Practice Office Building
This is the “syndication” that I'm in charge of, at least for a few more months. It only gets appraised and revalued once a year in the middle of the year, so this return is really from the last half of 2021 and the first half of 2022. But it returned 14.67%. I don't expect that for this next year!
Indianapolis Apartment Building
Careful readers will recall this syndication, bought through blog sponsor and real estate crowdfunding platform Realty Mogul, was sold in 2020. But in each of the last two years, I received another check that further boosted its return. This year's return was almost 10% of the original investment! Since I had no capital at risk, I guess that's an infinite return as calculated for just 2022. In the end, this $10,000 investment that we made in 2014 paid me $16,214 between 2015 and 2022. XIRR tells me my return was 9.96% per year, which was a little less than pro-forma.
Origin Fund III
This fund ($100,000 investment), run by blog sponsor Origin Investments, has been returning a lot of its capital and earnings in 2022. I'm told it will probably wrap up completely by 2024 and probably underperform pro-forma by a bit. Management blames that underperformance on being overly conservative during the pandemic. I calculate my 2022 return at 29.91%, and my overall return (2017-2022) at 14.22%.
Houston Apartment Building
This is the disaster of my portfolio, due to operator fraud. I'm still expecting a full loss here, but it's not done yet. My K-1 from this investment last year had literally no numbers on it anywhere. I marked it down from its original value to $0 this year, so my return for 2022 was -100%. Overall, my return is -97.55% per year. That was $20,000 invested, and I only got $1,906 out of it before it stopped paying. This might be the biggest reason I stopped doing syndications in favor of funds. Diversification matters.
Fort Worth Apartment Building
This $100,000 investment is a long-term (8-10 years) syndication purchased through blog sponsor 37th Parallel in 2018. I'm still valuing my share at the original purchase price so the return reflects only the income, which has been below pro-forma. The 2022 return is 2.47% with an overall return of 2.86% per year. You can't judge a book by its cover and you can't judge the returns on a syndication until it goes round trip. For this one, that is still many years away.
Origin Income Plus Fund
This was another $100,000 investment from blog sponsor Origin Investments. This is its evergreen fund that's more focused on income but still with lots of equity and preferred equity in it. This fund returned 10.2% in 2022, and overall, it's had a return of 9.66% for me. Too bad every year couldn't be like 2021 (22.49%). Still, in a year like 2022, I'll take it.
37th Parallel Fund I
This $100,000 investment from blog sponsor 37th Parallel had a return of 3.56%, and overall, it's had a return of 3.45%. Note that I am still valuing this investment at its original purchase price, so the return only reflects the income.
Alpha Investing Fund I
The first fund from a previous blog sponsor, this was another $100,000 investment made just before the pandemic. It has returned just a little bit of the capital and some income over time. The 2022 return was 3.33% with an overall return of 6.35% per year.
MLG Fund 4
This is a newer investment made in late 2020, via blog sponsor MLG Capital. It has already returned a small amount of capital. The 2022 return was 10.47% with an overall return of 7.17% per year. I still consider the value of my holding to be the capital I paid in minus the capital returned so far. So, that return is mostly income but also some from the property or two that have been sold. Like with the 37th Parallel investments and Alpha Fund, these properties are not appraised every year because there is no liquidity. While that saves costs, it does mean that interim returns aren't so accurate.
[Update prior to publication: Interestingly, this investment started reporting a Net Asset Value in between the time I wrote this post and when it was published. So, the value of this investment “instantly” went from $236,000 to $349,000. That increased my overall IRR on it from 7.17% to 31.95% per year. My IRR for 2023 alone is nonsensical (3,177%) now that it has increased in value 48% in just six weeks. That also increased the overall return on all of our private equity real estate from 8.07% to 10.83%. Imagine if that happened for the other seven of these investments that don't report a NAV regularly.]
Unnamed Fund
Another multi-family equity fund we own was purchased in mid-2021. The capital is only about half called so far. I'm calculating the 2022 return and the overall return as 0% still since it hasn't paid any dividends and none of the properties have been appraised since purchase.
DLP Housing Fund
This open multifamily fund from blog sponsor DLP Capital provided us with a 2022 return of 18.93%, with an overall return of 14.62%. Like the Origin Income Plus Fund (but none of the others mentioned above), this one is evergreen/open. You can still invest in it with a $100,000 minimum.
Peak Housing REIT
This one from blog sponsor The Peak Group is different from most of those above in that it does not invest in multi-family but in single-family homes. As a REIT, it just sends you a 1099 (no K-1 requiring multiple state returns). Our $25,0000 investment returned 18.23% in 2022 by my calculations. However, I noticed its value has been marked down in the first part of 2023. Our overall return on it is currently 1.27%. You can still invest in this one ($25,000 minimum), and I expect to put some more money into it in 2023.
Update after publication: The Peak Housing REIT has suspended liquidity and isn't taking new investments in 2023 as it struggles to stabilize debt in the current macroenvironment. See the comments section for details.
Wellings Fund
This one from blog sponsor Wellings Capital invests in mobile homes and self-storage. It was brand new for us in mid-2022, so there's no return on it yet. I'm still calling it 0%. You can also invest in this with a $50,000 minimum.
Since stocks, bonds, and public REITs were all down sharply in 2022, that's where most of our new money went in 2022 to rebalance those portions of the portfolio. As a result, we didn't invest much in private real estate in 2022. We expect to invest more there in 2023 (and already have). Our first investment in 2023 was a dedicated self-storage fund. We'll report on that next year. Otherwise, we expect to see some more money going into funds we already own, like the DLP Housing Fund, Origin Income Plus Fund, Peak Housing REIT, and Wellings Fund. We've already got enough complexity here, so we're trying not to add a lot of new investments to keep track of if we can help it.
Private Debt Real Estate – 5% of Portfolio
One of our favorite portions of our portfolio—although it's, by far, the least tax-efficient—is debt real estate. My preferred vehicle here is funds, especially funds run by people with experience running equity funds. That's because the risk with a debt fund is that, in a really bad real estate downturn, that debt fund will become an equity fund as the fund forecloses on the properties it has lent on. Essentially all of the loans in this portfolio are in first-lien position with conservative loan-to-value ratios. But they do have occasional defaults. Our 2022 return for this asset class was 9.47%, and our overall return since 2017 in this asset class has been 9.50%.
AlphaFlow
I was pleased to FINALLY wrap this investment up in 2022. It was originally a $20,000 investment made in 2017. I haven't been happy about it either. As soon as I got the capital invested with this RIA, the operators decided they didn't want to serve small investors like me and started liquidating the fund—in drips and drabs over four years. It was like exiting Lending Club and Prosper all over again with $40 at a time hitting my checking account, making for an accounting/return tracking nightmare. They finally either got the money back from the developers or wrote it off. The 2022 return was -50.78% as they wrote off the last few notes that were in default. The overall return was 5.34% per year. It seemed like a good idea, but in practice, it was super annoying. I'm glad to have it out of my portfolio.
Arixa Secured Income Fund
This debt fund out of California is incredibly boring. It tends to have a little bit lower returns than some of the others we have invested with over the years, but I think Arixa does a nice job. It was very much a “steady Eddie” in our portfolio with a 6.88% return for us in 2022, with overall returns since our original investment in 2018 of 7.12%. I love that they're evergreen/open and that they reinvest my dividends. We're actually making a change here in 2023. We're pulling out of this fund, which has been in taxable, and we're reinvesting a larger amount in Katie's self-directed 401(k). This fund had been, at least temporarily, closed to new investments so our new investment is in its other fund, the Enhanced Income Fund. That fund tends to have a little bit higher returns but also uses significant leverage. We're in talks with Arixa to possibly sponsor the site in the future, maybe even by the time this post runs.
CityVest DLP Access Fund
A former sponsor of this website, this was CityVest's feeder/access fund into the DLP Lending Fund (more on that later). Many WCIers invested alongside me in this one. It wrapped up in late 2022. I calculated my 2022 return at 5.69% with an overall return of 8.57%. Not too bad, especially with minimal hassle for me. Basically, it did what it said it was going to do: provide a lower minimum investment in exchange for an additional layer of fees. Lots of WCIers complained about communication and customer service issues with CityVest, although I never experienced them personally.
Unnamed Debt Fund
We've been in this fund for almost three years now. It's with the same company as the unnamed equity fund above. The 2022 return was 10.11%. The overall return has been 8.44%. It's actually probably slightly better, as their reporting mechanism seems to lag behind that of others by a few weeks. Maybe someday they'll let us (or maybe even pay us) to tell you who they are.
DLP Lending Fund
Another sponsor of this site, I like this fund just as much as I liked Broadmark (which went public a couple of years ago, causing us to sell the investment after a nice run-up). It's in my self-directed WCI 401(k). In part, due to many white coat investors investing with them, DLP is expanding operations lately with more funds, more staff, and larger funds. Fees on this fund went up too, unfortunately, although DLP still expects to provide similar preferred and projected returns. Our 2022 return on this fund was 11.74% with our return since early 2021 at 8.97%. The only reason we don't invest more here is because we want to maintain diversification between different companies. But there's a good chance they'll get some more money from us in 2023. We expect this fund, the new Arixa fund, and the unnamed fund to make up our long-term holdings in this asset class. It's only 5% of our portfolio; we really don't want to deal with more than three holdings to minimize complexity.
If you're interested in pursuing real estate investing and working with some of the WCI-vetted partners that I invest with, here are some of the best companies in the business.
Featured Real Estate Partners
Conclusion
Overall, private real estate investments took a victory lap in 2022. They smoked stocks, bonds, and public REITs. Not just positive returns while everything else was doing poorly, but solid returns that definitely helped our portfolio to only have single-digit losses in 2022. People ask me, “Why do you invest in that complex, expensive, opaque stuff?” Now, I'll be pointing to 2022 as Exhibit A.
Is it worth this complexity (13 equity holdings and three debt holdings) for just 15% of our portfolio? I think so, but those equity funds have definitely brought on a lot of hassle and expense at tax time. We filed in 12 states last year, and without private real estate, it would have only been three. As investments get larger (and each time we invest in a new investment, it's a larger amount), the relative tax cost (currently tax prep fees are just under 0.3% of our private real estate portfolio) becomes less. But it is never going to be as simple as the mutual fund portion of the portfolio.
We've done a great job increasing the tax-efficiency and decreasing the complexity on the debt side. We're down to just three holdings now, and two of them are in tax-protected accounts. We hope to also cut the number of our equity investments in half, but it's going to take some time.
What do you think? How did your private real estate do in 2022? Do you expect much worse returns in 2023 as assets are marked to market? Comment below!
We did similarly well with our private real estate holdings in 2022, and I agree that adding this asset is worth the minor hassle and increased complexity. We have some overlap, as we also own shares of Origin’s IncomePlus Fund and we entered and exited the DLP Lending Fund via CityVest with you.
Overall, I’ve invested in over a dozen deals in the last 5-6 years and have exited from 7 of them. I’ve been more lucky than good, and have thus far seen positive returns with several in the single digits (IRR) and two over 50%. I wish I had made larger investments in those last two, but hindsight is 20/20.
I laugh when I see the unnamed funds in your list (who wouldn’t want the publicity), and I cringe when I see that total loss, but I applaud you for sharing it. People do need to understand that losing 100% of committed capital is a possibility any time you go in on an individual deal. Like you, I’m aiming to simplify and will stick primarily or perhaps exclusively with diversified funds for new investment.
Cheers to a solid 2022!
-PoF
I have a very similar allocation and breakdown to real estate holdings. 37th Parallel is our only group that is the same. I have 5 other real estate fund companies that have done well. Glad to have had this diversification in 2022, but prepared for some bumpier roads ahead with rising interest rates.
I was not prepared for the extra tax implications when I started the real estate investing. It is a definite downside to branching out. But so far has been well worth the extra effort and cost come tax time. I’m glad you mentioned it in the post…as it is something people need to be aware of!
I think I still see 5% of those stock/equity investments available for a nice Bitcoin purchase whenever you are ready. 😉
Might be a good year for Bitcoin, but I’m content to watch that show from the cheap seats.
“This is the disaster of my portfolio, due to operator fraud.”
Ouch. Have you written about that? Or will you? I’m curious how that played out.
I’ve been extremely lucky with syndications so far.
Agree…I had the same thought. It is one of the biggest risk with private investments like this. I haven’t had it happen with any of my real estate investments but have had oil and gas investments end like this.
Hopefully he shares some juicy details!
No, but will when it’s all over. Who knows how long that will be? It’s still possible I will recover some principal, but I’m not counting on it.
There was a property in Origin Fund III that was also written off, but good returns on the other properties mostly made up for it. No fraud involved there.
Seems crazy to have that much complication in so many real estate deals. Just doesn’t pass the KISS test but to each his own I guess.
In a year like 2022 it seems worth it, but I totally get the sentiment. I’d still be dealing with 6 K-1s even without the real estate though.
I have also invested with DLP in their Housing Fund, Income and Growth Fund and with Origin in their IncomePlus fund plus some investments with Alpha Investments as well. Overall good sponsors and communication, no fraud (hopefully ever). Performance has been great with DLP and Origin so far, and mixed with Alpha as those are individual deals and some that had variable rate financing heading into 2022 are facing some major headwinds. Overall I think it’s been worth the extra complexity at tax time, though I am trying to be VERY discriminating on any new individual deal that would be in a new state requiring an additional state tax return…would have to be really worthwhile for the extra hassle. I also much prefer the safety, diversification and hopefully improved long term tax efficiency of the evergreen funds. Having regular passive income that is starting to increase has been really empowering and helpful with confidence as I approach retirement planning. Having 6% or so dividends nearly tax free and coupled with equity growth rates that are just a button click away really adds a lot of flexibility and is a major part of our financial plan. We are targeting about 30% private real estate investments in our overall portfolio which is a bit more aggressive than WCI.
How come you don’t own long term bonds? I know silly in retrospect given how much they have fallen, but a lot of portfolios recommend them, any reason you don’t use them?
Why does private equity real estate do well but REITs don’t? I thought inflation good for real estate so why do REITs go down but private equity real estate goes up?
I don’t own them because I take my risk on the equity side. Long bond risk showed up in 2022. That’s why I don’t own them.
The question about why there was such a disparate return between public real estate and private real estate is a good one. I gave three potential reasons in the post, but I suspect the most important one is simply lag. What hit public real estate in 2022 will probably hit private real estate in 2023.
Real estate tends to do okay in inflationary times, but given how much debt is used rising interest rates definitely hurt.
Shares of public REITs are much more liquid, so they tend to display wider price fluctuations (both up and down) due to investor sentiment. In other words, public REITs tend to behave more like stock market equities. The true value is likely somewhere in between the published private equity NAV (which has a lag) and the public REIT share price.
“Is it worth this complexity (13 equity holdings and three debt holdings) for just 15% of our portfolio? I think so, but those equity funds have definitely brought on a lot of hassle and expense at tax time. We filed in 12 states last year, and without private real estate, it would have only been three”
Really ? come on Dr. Dahle, you should be preaching simplicity not complexity. Is this the example you want to set for young doctors ?
I’m not leading a cult here where I tell people to do exactly what I do. I’ve always maintained investing in real estate in any manner is optional.
If it were all about simplicity I’d have all my money sitting in a Life Strategy fund, but there are some benefits to some additional complexity. In this case, the fact that my portfolio only lost 10% last year instead of 16% ish.
Everybody has to decide for themselves how much more complexity they’re willing to deal with.
You truly can not do the ‘New 60/40’ portfolio without owning Private Real Estate (PRE).
For decades pension funds, endowments, and other institutions have incorporated PRE into their portfolios.
Over the last 10 years, more (and better) PRE vehicles have become available to the average investor, especially for 401(k) plans.
We have been using private real estate funds for portions of fixed income for the last seven years. Thus, we have enjoyed double digit gains over this period, compared to a 0.5% annualized return for the Total Bond Index.
In fact, in 2022 one of the most visited pages on our website was a page that has the historical performance of the NFI-ODCE Index. The ODCE Index (Open End Diversified Core Equity), is the Private Real Estate Index that institutional investors use for their benchmark comparisons. It is clear that individuals are finally starting to realize what Jim Dahle has been telling the WCI audience for years.
I thought the minimum for DLP was now $200,000. The post states the minimum is $100,000. Wondering if that’s a typo or they’ve adjusted their minimums.
It was just adjusted. Actually between the time this post was written and when it was published so the initial email said $200K. It’s currently $100K for WCIers, but obviously always subject to change.
Wow. That’s great news. Thanks for the info.
Dr. Dahle,
Excellent review. Thank you!
Do you know whether private equity real estate offerings use independent custodians?
We are interested in investing, and think an independent custodian might help us steer clear of any Madoff-like schemes.
Thanks for any insights here.
Generally not. It’s a valid concern. The operator has access to the cash because it is sitting in a bank account controlled by the operator. Do this long enough with enough operators and you will almost certainly invest with a fraudster. If that is a risk you are unwilling to run, stick with the publicly traded markets where there is more regulation.
Thanks very much for the info. Wish the answer was different 🙂 but great to know.
I mean, there can be a custodian involved. Like my 401(k) money is held at Fidelity. But once I invest in a private fund with that money at Fidelity, Fidelity sends it to the fund bank account. Then you’re at the mercy of the fund manager/accountant/auditor etc.
“DLP Housing Fund: This open multifamily fund from blog sponsor DLP Capital provided us with a 2022 return of 18.93%, with an overall return of 14.62%.”
Can you explain what you mean here? What do you mean by 18.93 (are you included as a general partner or common equity holder?) vs. 14.62 (was this the LP return?)? And, I wasn’t aware the 2022 final results have even been published yet?
There is a value reported on the website; that’s the one I use when calculating my returns. I think you’re right that they value the properties and provide liquidity each Spring in that fund though. It’s really no different from the syndication I run. We value it once a year in June. So from June to June, that’s the value I use.
18.93% is the return for 2022. 14.62% is the return from the time I invested until present.
Jim, I’m still confused. I’ve been in the Housing Fund since inception. The 2021 calender return was clearly communicated at 42-45%’ish, depending if dividends were reinvested. The 2022 results so far have been 6% preferred monthly dividend plus approximately 1% year end excess cash distribution, still awaiting overall portfolio asset value adjustment. It seems like we’re talking about different funds, unless my wires are completely crossed here. And there’s nowhere that DLP lists NAV in any ongoing way, that I’m aware of.
I suspect part of what they’re calling the 2021 return is reflected in my 2022 return because of the way they calculate their returns. All I do is look at the value of my investment at the end of the year. If you log in to your DLP account, click on your most recent statement and look at “unreturned capital”. That’s the number I use since I reinvest everything. If you’re taking/spending your distributions you’d need to account for that when calculating your returns.
What I can tell you is that I had $258,337 on that statement at the end of 2021 and $307,244 at the end of 2022. I contributed nothing and reinvested everything. How would you calculate my return?
DLP returns come in 3 components:
1. Monthly dividend
2. Annual EDC (excess cash distribution)
3. Annual portfolio re-valuation.
Number 3 is pending for 2022. I believe they will update 2022 ending portfolio value once this is settled. It will show up as a new document dated Dec 31, 2022. Should be just a matter of days. At least, this was the process at the end of 2021. The re-valuation, I believe, is as of Sept 2022.
If, for some reason, the portfolio value on Dec 31 doesn’t end up reflecting the annual re-valuation, I can see why our annual return numbers would be different. Over the life of the investment it won’t make any difference.
Probably best to think of this as a “time weighted return” (like what Morningstar publishes for a mutual fund) and a “dollar weighted return” (what I calculate using XIRR for my portfolio that takes into account my cash flows into and out of the investment.). I’m telling you my dollar weighted return. You’re talking about the time weighted return that DLP gives. The dollar weighted return is accurate. If I withdrew my entire investment on January 1st, that’s what I’d get. Of course, I don’t think DLP actually provides liquidity until after the annual valuation event. Your dollar weighted return could be completely different from mine and from the reported return by DLP, just depending on your cash flows for the year.
Yes, I’m tracking as DLP reports.
If you were to redeem your full (or partial) investment, the redemption request window closes in April sometime. Then, cash will be returned some number of months later with only the preferred return accruing from Jan 1 until redemption date, based on December 31 (i.e. Sept market value) fund valuation. I think another general analog of describing the difference of our tracking method is cash vs. accrual accounting. Thanks for the dialogue.
Thank you for this Post Jim. I really enjoyed it.
Are you still considering investing the same allocation in these types of investments in the upcoming year(s) with interest rates/mortgages where they are now? I realize mortgage rates have beens as high as 18% in the 1980s and 10% in the 1990s and some of these companies have been around that long and made money through those times as well as going through 2008 crisis. It seems there is a new variable, as far as I know, there is a has been a never seen before rapid increase in less than a years time going from almost 0 to 4% base rate which has caused unintended consequences on real estate. With the recent failure of SVB and Signature Bank and fear of a wider spread problem I just received an email from one of your above sponsors yesterday talking about how they are too looking at exposure with some of the Banks/Lenders they use . I realize the nature of this question is like asking you when is a good time to get in the stock market, but just wondering how or if this has changed your perception on investing in these types of investments in future years?
Most of these companies were not around in the 1980s and 1990s. MLG may be the only one of my investments (besides Vanguard) that was around.
But no, I have no plans to change my static allocation.
Every one of my investments sent me an email in the last 3 days about SVB. I think they feel obligated to do so. I worry more about my local bank account (which is on the “watch list”) much more than any of these real estate investments during this banking crisis. But yes, rising interest rates are not good for real estate, bonds, stocks etc. returns. But my crystal ball is cloudy so I stay the course and in the long run that seems to always work out well.
Thanks Jim for sharing this. I’m wondering if Peak Housing REIT is still a WCI sponsor as their name seems to have been removed from the sponsor list?
That didn’t take you long to notice. We just removed them a few hours before you posted your comment. Peak Housing REIT is in a bit of trouble due to issues with the debt/preferred equity for the REIT. They haven’t been taking investor money at all in 2023 so there’s no point in listing them anyway.
[Update to this comment: Joe Ollis reached out to me today with a FAQ and we had a short conversation. It’s actually not nearly as bad as I first heard. My opinion is this is probably recoverable but 2023 returns will be rough. They’re posting a FAQ which should answer most questions. I’ll post it here as it isn’t up on their site quite yet]:
Questions and Comments, Summary:
1. Did the Peak Group expect Bluerock to enforce its priority position in the capital stack as
explained in the letter?
a. No, Peak REIT management did not expect this to occur. Peak REIT management and
Bluerock expected that after initial growth phase, most of the preferred equity would be
paid off with recapitalization utilizing low cost senior debt.
2. Why does Bluerock have a say in how to distribute cash flow?
a. Bluerock, as a preferred equity investor invested behind the senior lender but in
position to pay out prior to the common equity investors. The preferred equity
investment was allocated towards acquisitions of homes 100% owned by the REIT in
addition to investment in Joint Ventures with build for rent projects, and the Joint
Venture with Bluerock. All of these assets are illiquid, requiring the REIT to satisfy the
paydown of the preferred equity through the sale down of assets.
3. Can you share with investors the capital stack? It sounds like you are saying that 55-65% of
the stack is government agency. How much is the preferred + construction loans?
a. Preferred Equity: Approximately $16 MM is remaining.
b. CoreVest Line: Approximately $9 MM is remaining. This line was used for our heavy
value add loans and is floating, not fixed. The loan comes due in June 2023.
4. How much of the Preferred Equity has been paid off, to date?
a. Currently, the REIT has paid $4 MM of the approximately $20 MM owed to Blue Rock on
the preferred equity position. The proceeds from the sale of the REIT's minority
position in the following portfolios made this possible: Indianapolis, IN, Springfield, MO,
and Savannah, GA.
5. What will the REIT look like after the REIT has paid the preferred equity?
a. The REIT will sell a variety of assets with focus on maximizing the equity proceeds and
potential profit produced at each sale. The total number of homes sold is estimated to
be between 100-200 homes.
b. In addition, it is estimated the REIT will sell the land in Burleson, TX, a community called
East Park Estates, that the REIT owns alongside other limited partners.
c. It is estimated the portfolio of homes owned directly by the REIT will be reduced from
approx. 700 homes to 500 homes, spread across the following Texas markets: DFW,
Texarkana and Weatherford (land).
d. It is estimated the REIT will still have ownership in several Joint Ventures, both in homes
and development projects.
i. The REIT has an ownership position in Single Family Rental portfolios in Texas
(Corpus Cristi, DFW, Texarkana, Lubbock)
ii. The REIT has ownership in multiple Build for Rent communities in DFW: Willow
Park, Forest Hills, Springtown and Burleson (Magnolia Townhomes)
6. How might the BFR development deals be impacted by the actions of the REIT?
a. The REIT is the General Partner (GP) in several of our BFR offerings. The goal and
preference is to maximize the returns in the BFR investments upon sale, which the REIT
will take part in for its investment made at the GP level. The REIT will likely need to use
the investment return, proceeds to continue to pay down or pay off the preferred
equity to Blue Rock.
1. When will the REIT be able to revalue shares and possibly continue to pay distributions?
a. After the sale of 200 homes and preferred equity paydown, the REIT will reassess its
financial condition, possibility of distributions, and current share value.
2. After selling the 200+ homes, would it be a possibility to group say, 30% of the portfolio to be
cross-collateralized in order to get an extra loan so as to repay the Bluerock preferred equity
and provide limited redemption to REIT investors in need?
a. This is a possibility and something Peak REIT management will likely try to do.
3. What has been the initial discount to NAV for the houses sold thus far?
a. One-by-One transaction: The REIT have sold 34 assets directly owned by the REIT since
starting disposition. The assets were sold at a 9.63% discount to Q4 valuation ($12.02 NAV).
These homes were sold primarily through the MLS (Master Listing Service) in one-off
transactions.
b. Smaller Portfolio Sale: The REIT is under contract to sell a portfolio of 17 homes to an
institutional investor for a 5% discount to Q4 valuation ($12.02 NAV).
c. Mid-Sized Portfolio: The REIT is near completion in the sale of 20 homes to an institutional
investor at an approximate discount of 20% to the Q4 valuation ($12.02 NAV).
d. Opinion: At the moment, portfolio sales deliver speed, but at a higher discount to our Q4
NAV. The REIT will continue to evaluate both options and strive to keep the cost of the
transaction (fees associated with the sale of homes) to the lowest available in today's
market. Specifically, the REIT has been negotiating a contract with Roofstock, who has a
service called S3. Depending on the quality / rental rate of the home, S3 will either 1) clean
and minimally improve the homes where the tenant has vacated. These homes will be sold
to investors that frequent Roofstock. 2) For homes that could command a higher sales price
with investment, the REIT will have the option to invest in improving the asset and take it to
market at a higher value through Roofstock. The S3 service is going to be efficient at selling
homes to the scale the REIT require while also minimizing fees. Roofstock commissions are
lower than the standard market rates; they will start at 2% and will gradually move lower as
the REIT sell more homes.
1. How are the actions being taken today impact investor equity or the REIT NAV?
a. The short answer is Peak REIT management doesn’t know yet, as the net impact to the
REIT NAV will be determined by the sale price achieved when selling each home, and
how many homes end up being sold to redeem the preferred equity.
b. However, as homes being sold have leverage, each home sold for a loss has an impact to
the net asset value on a leveraged basis. For example, when selling at a home
purchased for $100,000 with a 70% loan ($70,000 loan) a 15% discount on the sale price
would result in a 50% loss of equity.
1. Home Purchase for $100,000 = $30,000 of equity + $70,000 Loan
2. Home Sale at 15% discount to $100,000 = $85,000
3. At Sale, pay off $70,000 loan, remaining equity = $15,000
4. The $15,000 remaining equity is 50% of the original $30,000
2. Can investors expect to get back some of their equity? What is this dependent on?
a. There is a wide spectrum of outcomes depending on our ability to control the speed of
disposition to maximize the sale price of the assets. Peak REIT management needs to
demonstrate consistent progress towards paydown of the preferred equity. Ideally, the
REIT is given time to execute for the best possible price and not have Bluerock, the
provider of the preferred equity, insist on an immediate sale.
3. How do you split up the remaining value in the REIT after the payoff of the preferred equity?
Specifically, how will you provide liquidity to the Limited Partners? Is it based on first-
requested? Or, will remaining capital be split proportionately?
a. For investors that would like to "put" the shares to the REIT for redemption it will be pro
rata – based on redemption request and not based on when requested or timing of the
request. The Peak REIT officers have not requested redemptions.
4. Will REIT investors be paying the 1% disposition fee (on gross sales price) and acquisition fees
(1.35%) to execute the churn in the go forward plan?
a. No, the Peak REIT management has decided not to charge a 1% disposition fee and will
also forgo charging the REIT a 1.35% asset management fee during this disposition
phase. Peak REIT management is minimizing all fees to retain as much capital as
possible to pay down preferred equity and the Core Vest line.
Thanks Jim for the details.
As a $100k investor through WCI, I am (more than) curious about whether Bluerock ‘s demand for return of capital reflects their own urgent need for cash or some suspicion about PEAK’s soundness. I’m probably oversimplifying but it would seem that if the houses are sold at a profit or break even this would not have a big impact on our investments but if sold at a loss this would be potentially disastrous. Why is PEAK being forced to do this?
You can call them up and ask yourself, but my understanding is that Bluerock has some sort of call option on its preferred equity and it is exercising it. But the houses are being sold at a 8-20% loss from the most recent peak. Whether it’s a loss from purchase price I’m not sure. They seem to be trying to get Bluerock to give them time to get better pricing on the sales but are under some pressure.
I think there’s a wide range of potential outcomes here, all the way from a 100% loss of capital to a complete restoration of principal. It’s just too early to know what’s going to happen. I guess we’ll be along on the ride together.