An opportunistic strategy for income-focused investors
Our new private credit investment strategy capitalizes on the changed economic environment, offering some of the most attractive potential risk-adjusted returns of the past decade.
A once-in-a-decade lending environment
The Federal Reserve raised interest rates at record-breaking speeds over the past 12-18 months to attempt to tame inflation. This policy shift has destabilized markets, leading to broad dislocations, increased strain across the system, and a potential liquidity crisis that presents a risk to the global economy.
Simultaneously, those factors have combined to create what we believe is arguably the most attractive environment for credit investments in a generation.
What is private credit?
Private credit (or private lending) is an asset class that consists generally of loans, fixed-income, or other structured investments that aim to deliver higher yields with lower overall risk when compared to equity investments. In other words, investors in private credit are lending money to borrowers in exchange for a fixed rate of return (often captured in the form of an interest rate or preferred return) but typically do not have any equity ownership or upside participation. Similar to other private market assets, private credit differs from publicly traded credit or fixed-income investments, such as bonds or asset-backed securities, because it is illiquid and consequently aims to deliver a higher relative return.
The profitability of preparation
As a result of the Fed's extraordinary actions, today it's more expensive to borrow money for 30 days than for 30 years. This is an unnatural state of affairs that we believe is creating a once-in-a-decade liquidity crunch that we're calling The Great Deleveraging.
During this period, individuals and companies seeking to borrow money, especially in the near term, will be forced to do so at significantly more favorable terms for investors. Higher interest rates will generally mean that borrowers will borrow at much lower leverage (which means lower risk). Virtually any loan maturing in 2023 will require a paydown, and for new loans the gap between the expected and actual proceeds will likely require the use of “bridge” or “mezzanine” financing.
Meanwhile, investors who have been diligent and chose to maintain larger cash positions over the past few years will be in the enviable position of being able to demand significantly more return in exchange for providing liquidity during what we expect is likely to be a temporary period of realignment. Delle is in that position.
Important Note: In our experience, these types of unique investing environments are short-lived. Accordingly, our expectation is that the current period of disruption is unlikely to last beyond 2024.
Source: Historical Treasury rates sourced from St. Louis Federal Reserve Economic Data (FRED). Forecast based on FOMC projections for the Fed Funds rate and Delle internal analysis of Treasury spread behavior from historical yield curve inversion events.
Billion-dollar experience
While this strategy is newly calibrated for this environment, we’re able to draw on a deep well of executional experience. Since 2012, we’ve acquired or financed over 37,000 residential units and have made more than 71 unique mezzanine and preferred equity investments, collectively worth more than $7 billion.
$516 million
Capital Deployed into Debt Projects
90
# of Deals
20,194
# of Units
10.8%
Avg. Net Interest Rate
Market dislocation creates opportunity
The opportunities created by the Great Deleveraging are unique in that nearly every borrower and every asset (regardless of credit quality) are impacted, hence the name “Great.” No matter who you are, if you were active in business over the past several years then you were inevitably borrowing to some extent. And if you were borrowing at all, then you were borrowing at low rates and relatively high asset values.
Now that the environment has shifted, regardless of the quality of the underlying asset, as loans mature and come due, there will be a gap created during the refinancing period where new equity capital must come in to pay down the overall size of the loan.
Funding the gap
Our strategy is to focus on bridging the funding gap and providing rescue capital to borrowers in the midst of the liquidity crunch. By lending into the gap, we are able to invest at a healthy margin of safety, concentrating on high-quality assets with creditworthy borrowers—those who are experiencing circumstantial liquidity needs as a result of interest rates rising so rapidly through 2022 and 2023.
In these instances, the underlying assets themselves are typically unaffected by the financial turbulence happening in capital markets. Most frequently, the borrower is in the middle of a business plan to enhance the value of the property, such as new construction, renovations, or lease-up, and simply needs more time to reach stabilization and be ready for long-term, fixed-rate debt.
EXAMPLES OF THIS KIND OF ACTIVITY INCLUDE:
- Originating and structuring real estate loans, including senior mortgage loans and subordinated mortgage loans
- Providing mezzanine financing in the form of preferred equity, B-notes, or second trusts
- Sizing the mezzanine or preferred loans to a GSE (e.g. Fannie Mae or Freddie Mac) exit
- Financing residential construction and development
- Acquiring subordinate notes and high-yield investments in the asset backed securities market,—single family rental portfolios, in particular
Focusing on the markets we know best
In terms of location, we will primarily target high-growth markets in the Sunbelt like Dallas-Fort Worth, Phoenix, Orlando, Tampa, Houston, Atlanta, Charleston, and Las Vegas. These are the markets we know the best: approximately 70% of all Delle acquisitions from 2021-2022 were in the four fastest-growing states—Texas, Florida, North Carolina, and Georgia—and more than 90% were within the Sunbelt.
We believe that by maintaining rigorous credit underwriting with a heavy emphasis on residential rental properties, we have the opportunity to achieve some of the best relative risk-adjusted returns since the aftermath of the Great Recession in 2008.
Waypoint
As part of our new private credit strategy, we’ve invested roughly $20.8 million to provide financing in the form of preferred equity for the development of the Mason at Daytona Beach, a 300-unit multifamily community on 65.4 acres of centrally located land in Daytona Beach, Florida. Under the terms of the investment agreement, the borrower has agreed to pay us a 13.5% fixed annual rate that will accrue for as long as it takes to finish the project, and our investment will be paid back upon its completion. This is one of many projects in the Delle Portfolio.
During this time, we have also worked with a majority of the top banks, sponsors, and capital brokers in the market, establishing a reputation as both a good partner and, importantly, as a partner who is not a "loan-to-own shop," seeking to prey on distress. As a result, we've become a sought-after capital source and developed a robust pipeline of deal flow tailored specifically to this type of opportunistic lending.
Our banking and real estate partners
