Amidst the market volatility and constant news flow, we recognize the anxiety that the current environment may cause. To that end, we are reaching out to reiterate why our fundamental philosophy is to invest with a margin of safety and what that means.
It is important to note that we, the Streitwise principals, along with our families and friends, are significantly invested alongside our shareholders.
If you spend any amount of time researching private real estate investment opportunities, you will no doubt come across the industry standard “sensitivity table.” It is a table of projected returns that illustrates a variety of return outcomes: if rents go down by X, if cap rates go up by Y, if occupancy goes down Z, and so on. Ostensibly, the objective is to present the reader/potential investor some level of comfort that “in a downside scenario, capital is still protected.”
In reality, bull markets paper over most mistakes. Negative surprises on any individual investment stand a good chance of being blessed into irrelevance by broad fundamental growth. Properties purchased with little margin of safety may still produce healthy returns for investors despite underperforming the initial projections. That doesn’t mean it was an appropriate investment decision.
Furthermore, while it’s important to understand how a varying range of inputs affect the return on, and of, capital, far too often investors are lulled into a false sense of complacency that the range of outcomes is somewhere on that table.
No matter what range of sensitivities are run, every number on that page is underpinned by a baseline assumption that the capital markets are functioning, that leases are still occurring, that credit is available, etc. But for brief periods of time in the financial markets, that is not the case. Each of the past three decades has experienced weeks, months, or longer, where uncertainty has been so high that markets were momentarily paralyzed. It no longer matters whether rents are 10% less than expectations if your loan comes due and you cannot find a replacement lender or if a handful of tenants go bankrupt and you are not sufficiently well-capitalized to hold the asset through a period of disruption.
This is why we place such a significant emphasis on the margin of safety. The “what if we’re wrong” aspect of underwriting is where we start and “what if it goes according to plan” is where we finish.
- Properties that generate cash flow from strong tenants are less susceptible to refinance risk and reduce the exposure to residual values and cap rate volatility.
- Conservative property-level leverage means a higher likelihood of being able to refinance, if necessary, during adverse market conditions.
- Long-term, fixed rate financing means holding through periods of extreme distress.
We do not purport to know when and how the current economic and financial environment will persist. But our margin of safety allows us to sleep at night knowing that we have the tools, the tenants, and the flexibility to ride through these episodes, however challenging they may be.
Despite the considerable effect of COVID-19 on the broader economy, our portfolio performance has yet to be materially impacted. This is in large part attributable to our adherence to our investment criteria – institutional quality buildings, creditworthy tenants, and conservative leverage. As of the date of this transmission, our portfolio is 97% leased, all our tenants are current on their rent payments, and we are servicing our debt and intend to continue regular dividends.
Streitwise is focused on providing institutional-quality office buildings with conservative leverage to withstand near to medium term downturns while generating cash flow over the long term. These are just some of the factors behind why The Motley Fool rated Streitwise as the best real estate investing service for conservative investors in 2020.
Eliot Bencuya is the co-founder and CEO of Streitwise. Eliot has extensive experience identifying, underwriting, and executing value-add real estate investments.
Prior to forming Streitwise, he was a Vice President of Acquisitions for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for originating, underwriting, structuring and executing transactions in the Pacific Northwest, Northern California and Midwest regions. Mr. Bencuya also held positions at Sovereign Investment Company (a subsidiary of the Marcus and Millichap Company) and the investment banking division of Merrill Lynch & Co. He holds a Bachelor of Arts degree in Economics and International Studies from Yale University, and a Masters of Business Administration degree from the Haas School of Business at the University of California, Berkeley. Mr. Bencuya is a member of ULI.