Hello Measured Investors,

Welcome to this first edition of The Measured Memo – a concise note that shares our perspective on private investing and commercial real estate. We’ll comment on macro trends, provide strategy updates and share stories of specific deals. We aim to make this the most value-packed email of your quarter…let’s go!

Market

Many parts of the real estate market (and larger economy) are a hot mess right now. Yes, it’s hard to do deals. Yes, banks are tight and getting tighter. Yes, some principals and sponsors paid too much for assets in recent years. Yes, some paid way too much and are in deep you-know-what.

Related to these trends, there will be pain felt throughout the system. Importantly, this pain will not be distributed evenly – because the trouble is almost exclusively related to rapid changes in credit markets (formerly too loose and too cheap…now restrictive and expensive), the pain will be highly concentrated to deals that are in precarious debt scenarios. Those that took high-leverage, floating-rates and needed large income growth just to qualify for the next round of funding.

Looking back, the apartment investing market in 2020 and 2021 looked a lot like venture capital markets – as long as there was another “recapitalization event” available, owners were fine. And those events kept presenting themselves on a gravy train that lasted over a decade. Alas, the music has stopped and those that were “getting loose” are now exposed.

This, of course, spells huge opportunity for anyone not dealing with assets weighed down by unsustainable debt. There will be distressed sellers and high-quality assets that sell for less than their debt obligations in the next 6 to 12 months. Which leads nicely into our strategy update…

Strategy

The very first question we asked ourselves when developing our investment thesis was where – what markets and locations will best serve our goal of generating the greatest risk-adjusted return? We plowed through data and spent months on airplanes visiting potential markets.

Des Moines, IA and Jacksonville, FL ended up as our winners and have received 99% of our attention since. Both are high-growth tertiary markets and they also happen to be our “hometowns” which provides inherit competitive advantage via existing relationships.

Jacksonville has proven to be an over-heated market with some buyers accepting higher risk than necessary to acquire properties. Our underwriting has shown a 20-30% spread between our valuations and on-market transactions. This is now proving accurate with some deals purchased last year already up for distressed sales to the tune of 30% off. We continue to believe in Jacksonville's fundamentals long-term, and will remain disciplined in finding the right cost basis before deploying live capital.

Des Moines, on the other hand, has produced favorable underwriting on a series of high-quality assets. This has resulted in Measured Capital acquiring 7 buildings in the past 12 months with another under contract. We’ve been able to acquire positive leverage (in-place return on the asset is higher than the interest rate on its mortgage) on every deal. Additionally, we are seeing 4-5% increase in rents on renewals while the national headlines report negative rents in all major markets. See this MMG report showing Des Moines in top 10% of markets nationally for rent growth.

Portfolio

Due to our operational success and the quality of new opportunities, we predict a whole lot more Iowa in the coming months. Our first deal here, DSM1 is profitable, distributing and recently received an unsolicited offer to purchase one of the buildings at a handsome profit. DSM2 just crossed it’s 100-day mark and we are looking to exceed our forecasted rents given the results of early renovations and leasing.

DSM3, a portfolio of three buildings near the metro core of Des Moines, just closed late last week. This acquisition is a perfect representation of why we continue to focus on this unique market – high-quality buildings, less than 20 years old, in high-traffic areas, with in-place rents producing positive cash flow from day one. $15.5M purchase price to gain ownership of 223 quality households ($69,500 per door).

As excited as we are to purchase these properties, this transaction is also a great representation of the friction in the current market. We learned about these assets in March and went under contract in May. With the calendar now reading October, it took nearly 5 months to close – in a deal where all parties worked collaboratively at each step. Gaining the necessary approvals for favorable debt simply took that long. Patience, while always a virtue in the real estate game, is now a requirement.

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Thanks for reading and hope you received insight and value. At Measured Capital, we are committed to always putting ourselves in the place of highest potential – and hope the time you spend reading this note is a place of high potential for you as well.

Please forward this note to any trusted friend you feel could benefit as well. We welcome your feedback and are grateful your trust.

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