“Our strategy is not to create a large vehicle to aggregate as many assets over time in order to increase AUM; we see this as a smart investment opportunity that may not last very long,” Yantz says.

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How do you define Dislocated Core and why is this asset attractive to Meadow Partners in the current environment?

At Meadow Partners, our Dislocated Core strategy involves investing in low-risk, stable, private market assets that are trading at valuations that generate returns that would be considered mispriced from a historic perspective.

Looking at the market today, we see the disruption caused by the dramatic rise in interest rates impacting valuations and resulting in risk-return premiums that create opportunities for investors to earn outsized returns by buying assets with very little performance risk. When combined with low leverage, we can create a compelling investment profile through which we can achieve reasonable upside without assuming much, if any, asset appreciation over time.

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Why is Meadow Partners well positioned to invest in Dislocated Core?

The fact that Meadow does not currently manage a large open-ended core vehicle burdened by historic performance, valuation and redemption issues the past few years means we can come to the opportunity with fresh eyes and fresh ideas of where to focus. And our strategy is not to create a large vehicle to aggregate as many assets over time in order to increase AUM; we see this as a smart investment opportunity that may not last very long. And our investment focus will still be concentrated on our core markets where we have existing relationships and are already seeing actionable deal flow.

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Do you have direct experience investing in Dislocated Core?

We have significant experience based on our existing core-plus separate accounts. While those accounts have slightly more leverage, and a different sector focus and investment horizon, they provide us with a highly relevant skill set to put to work with Dislocated Core.

We aren’t seeing as much competition in this space right now, as public and private REITs have been mostly on the sidelines and open-ended funds are generally net sellers. Regardless, our mindset is certainly different from others– we intend to buy well and then sell into a more normalized environment, rather than to aggregate a portfolio to hold long-term.

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Why does Meadow prefer to invest in Dislocated Core through SMAs?

This structure provides us with the opportunity to engage in open dialogue with our clients, share ideas, and develop a portfolio that meets their needs based on what we are seeing in the market, which is particularly important given the unknown scale and timing of the dislocated core strategy.

Most of our SMAs have started out with conversations about real-time opportunities in the market. In fact, our strategy and approach recently resonated with one of our large, existing public plan clients. They saw it as a great fit within their portfolio, and so, we put an SMA together relatively quickly.

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Given that investing in dislocated assets is usually limited to a downturn, how long do you anticipate the current opportunity to last?

I’ll let you know next year.

Honestly, each downturn in real estate has been different, and the current one has been particularly difficult to predict. That said, I believe that the first phase of recovery will be a more favorable rate environment, which should drive more transaction activity, new transaction comparables, the clearing out of legacy investments, and hopefully a renewed confidence in the sector. We would expect that to result in more equity capital flows into the market and increased valuations.

While all of that will take more than a couple of quarters, I would be surprised if we are still talking about this in 2-3 years. That’s why we believe it is critical to be prepared to execute real-time market opportunities as soon as they arise. Given our size, we can be nimble and create tailored investment solutions to match the opportunities we are seeing in the market.

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As the market begins to improve, how will the opportunity to source and execute Dislocated Core investments continue to exist?

I expect the markets to become more efficient and returns to come down as investors begin to focus again on portfolio composition as opposed to just absolute returns. As a result, I think we’ll see an increase in liquidity for less risky assets.

In the meantime, we are finding that most capital today is targeting high-yield opportunities such as distressed assets, high-growth sectors, and credit. Dislocated Core, while similar to credit, has differentiated equity upside through appreciation and income growth.

The majority of core real estate today is owned by large institutional investors, private REITs and open-ended core and retail funds, most of which are looking for opportunities to create liquidity due to redemptions and/or poor recent performance. Our value-add to investors is to be able to find those counterparties, source the truly “core” assets, and negotiate the appropriate price.

We joke that “investing in real estate is not like going to the grocery store where you can easily pick and choose.” You need to know where to look and who to call, and the right time to do so. With this in mind, I would expect owners to become less receptive to our calls as their liquidity improves…unless we tell them we have core assets to sell!

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How do you develop a pipeline of investable Dislocated Core opportunities, particularly given the time constraints of the market?

We leverage our long-term relationships as well as the new friends we have made in the market who specialize in these assets. We are only focused on our target markets – New York and London – where we have existing assets, experience and a good reputation. Historically we haven’t been able to buy from long-term core investors given the yield profiles. Having this unique product in today’s market, however, has led to more conversations.

The reality is that we’ve always had potential core opportunities, but it didn’t make sense for a firm of our size to try to build a new business line that was inherently a low return, low fee, volume-focused platform. At the end of the day, we are looking for unique and interesting opportunities that add value for our clients.

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What are examples of Dislocated Core investments you have made?

We just recently closed on two interesting retail deals in the past month.

One is a suburban mixed-use property that includes net leased retail and commercial pad sites with a weighted average lease term of over 22 years and inflation-linked rental increases. We purchased the asset from a large insurance company at a cap rate that was approximately 200bps wider than what it would have traded for historically.

The other investment was the main high street retail center in a primary London neighborhood with grocery and necessity retailers at a similar cap rate spread as the previous deal. We purchased that asset from a decade-old legacy investment fund.

Both assets fit the profile of being inexpensive, long income with low leverage, and located in dense, irreplaceable locations.