Katie Elsnab: And I think some additional color, and this also relates to the previous question, is just how the value-add strategy is playing out in Multifamily Fund V right now. Today, we’re seeing a 16.4% return-on-investment on the 3,000 assets that we’ve upgraded so far. So we are seeing that play out in the Fund strategy as well.
Ken Worthington: Okay, thank you.
Robert Morse: Not to pile on too much, but the tailwinds – in the fundamental tailwinds in Multifamily are enormous. We’re in an era today where it costs so much more to own than it does to rent. There are a number of aspirational homeowners who are now renters by necessity. There are a number of people who just choose to rent for extended periods of time over their life cycles. And we have a housing shortage in the U.S. So we think that our ownership and operation of these communities really speaks to the needs of folks who comprise that great big cohort of the U.S. population. We think that we also have developed over the decades, an ability to very cost effectively manage these communities on behalf of our investors, on behalf of our residents to provide a great experience for the residents and that’s reflected in very high occupancies.
It’s reflected, as Katie said in the metrics around financial performance. And the Multifamily Fund V vintage started-off at a peak time, but is ending up with investments at some pretty attractive value. So when you average that out and you overlay the operating metrics and performance that we seek to achieve, it should be, as Jonathan said, a very solid vintage, and certainly for something that was sort of in the apex of the market. If that’s the downside, it’s – we think it’ll be very solid.
Ken Worthington: Okay, great. Thank you. And maybe a question just on how your clients are reacting. So, if office is struggling, and I hear you a multifamily, maybe it seems to be struggling now. To what extent is the Bridge brand being impacted here by a couple of these areas that are struggling? And does the performance in these verticals flow through to impact fundraising in 2024 in areas that are more in favor, are performing better, like cross-sell like we think like Newbury. It’s like cross-sell is a factor here for secondaries and some of the other verticals. Are you seeing or hearing any flow through from investors in these struggling areas, maybe impacting your aspirations in the other areas?
Robert Morse: It’s interesting. It’s a really good question. It’s a question that we care deeply about, or an issue we care deeply about in terms of what our brand is and how we maintain and enhance the value of our brand. We start off with comprehensive and transparent communication and the view that bad news doesn’t get better with time. And we seek to be very transparent in terms of what we do. One vignette [ph], I was with a significant investor of ours, as well as others, and we were talking about this very issue. And I had mentioned the difference in performance between a couple of vintages of one of our funds and they stopped me and said, if you’re about to apologize, do not apologize. Your relative performance has been so much stronger than the other entities in which we’ve invested for the same strategy.
So my point is, relative performance matters and we think in good times we will outperform in our areas of competitive differentiation. We think in bad times we will outperform not as much, but certainly on a relative basis outperform as well. We have – amongst other things, we have the next vintage of our workforce and affordable housing investment vehicle that is in the market now. The early returns are very strong with respect to that, and that’s a pretty close variant to all the experiences in multifamily. And as Jonathan said, there’s – in the – or maybe to say it another way, in the teens from 2014 to 2020 or so, there was really very little J-curve as it related to investment vehicles when they were launched, because asset values were going up.
Now there is a J-curve again, and we think that the back end of that J-curve will result in some pretty significant relative and absolute value that’s created for investors. As it relates to the brand, we have found over the course of last year and this year and in the past as well that the value of our brand continue to grow. The recognition amongst the most prominent institutional investors continues to grow. The network of wealth management platforms with whom we have a dialogue and on whom we’re distributed continues to grow. We mentioned that in our prepared remarks. And in each case, institutional investors, wealth management platforms, everybody have a lot of choices and we seek to be a good solid choice that people can provide us with their capital and know that come good times and bad, we will do as well as possibly can be done with that capital.
Ken Worthington: Great. Thank you very much.
Operator: Thank you. Our next question comes from the line of Adam Beatty with UBS. Please proceed with your question.
Adam Beatty: Thank you and good morning. Just wanted to ask about the 3% markdown across the portfolio in 4Q. Just thinking back to the environment at that point, it seemed like the rate outlook was getting better. Public markets were definitely optimistic. So just wanted to understand the dynamics because the 3% was sort of the better part of the 5% for the full year. So that might have been a little bit unexpected. So just if you could a little bit about what would drive the markdown to get a little bit worse in 4Q and also maybe which subsectors or verticals might have driven that? Thank you.
Robert Morse: Maybe I’ll start there and Jonathan, I’m sure we’ll have some things to add as well. When you refer to the improving outlook, I think that as it relates – as your comments relate to broad market indices, that’s absolutely true. And that’s the crux of what we think creates the opportunity in real estate today. You have broad market indices, whether it be the S&P 500, whether it be NASDAQ, Dow or whatever that are at or near all-time highs. We’ll see when the market opens in three minutes whether Nvidia’s [ph] blowout results are going to create new all-time highs. And at the same time, in an environment of rising interest rates, you have real estate values that in our view, continued to reset over the full course of 2023, including the fourth quarter.
And it’s – there aren’t many asset – in our view, there aren’t many asset classes like real estate that have pretty substantially reset. And we – at the 2021 peak when cap rates for different types of assets were bumping around what now are interpreted as cyclical lows. Those cap rates have increased in some cases as much as 200 basis points, 250 basis points and 300 basis points over the course of the interest rate rises. And that’s what in our view, creates the opportunity for some generationally attractive entry points in real estate at this point. Part of the valuation processed which we go through certainly acknowledges the cap rate increases from the selected transactional activity that occurred over the course of the fourth quarter of 2023 and earlier quarters as well.
It also incorporates some of the operational improvements that we were able to achieve at our assets, and so the 3% is a net of that. But more broadly, we think that resetting of valuation parameters has created a pretty terrific entry point in our view, and makes it appropriate to start wading back into the water. Jonathan, any incremental comments to that?
Jonathan Slager: No. I think you did a good job, Bob. I think the bulk of it really is in the multifamily side, which obviously that’s the largest part of our AUM. And I think, I guess, the perspective that we have held is we took a lot of time on valuations because there’s so little clarity. I think that’s a simple truth. There’s very low transaction volumes. The transactions that happen, the cap rates that are evidenced are very broad and very wide, even within same markets and similar vintage and similar quality assets. So we spend a lot of time with our audit partners we spent a lot of time with, I can tell you right now the normal best information comes from the brokerage industry and the brokers are – they’re just throwing up their hands saying we don’t really know.
So I think that’s what’s made kind of marketing things challenging. We’ve always prided ourselves on trying to be as conservative as we can in marking without being extreme. And so we hope we found the balance here and the year end. That was how the numbers came out. I would add one other thing which was interesting, which was Q4, even though it seemed that there was some relief in sight with interest rates starting to move, we also started to see them move in a different direction. And so what’s happened? Every time we felt like we were getting to a place where the volumes were starting to return and people were ready to transact. The Fed says, okay, we’re going to probably be at the end of our hiking cycle. And so all of a sudden, sellers pull properties off the market, saying, well, maybe the values are going to be better next year, so we’ll wait.
So it’s been really interesting both in terms of trying to understand when transaction volumes will recover and exactly where trades are to try to put good marks on things. And candidly, on a positive note, we are under no pressure in any of our funds to trade in this market unless we get a great price. So we’ve gotten a few assets sold that we felt like we had really attractive pricing and we got really great returns on, just to kind of start to realize some of the assets in our older portfolios. I think we did a really successful recapitalization of our fund three vintage to print a really good total return for our investors. And so I think overall, it’s just right now the bulk of those marks really are related to multifamily. And as I said in our remarks, feeling that’s going to be – we’re going to see recovery on that as the debt markets stabilize, as interest rates come down, which they inevitably will.
Adam Beatty: That’s great. Thank you for all those details. I appreciate that. And then just a quick follow-up on just those latest remarks, because Bob in prepared mentioned seller capitulation. And so it seems like as the rate outlook changes, maybe sellers are capitulating or uncapitulating or what have you, but just wondering what you’re seeing and what areas in particular you’re seeing more capitulation, which may be, while painful, may be healing for the markets ultimately? Thank you.
Jonathan Slager: Yes. We’re – I think right now the capitulation is really slow, I guess is the best way I could say it. And I think that we have the time when we’re actually going to see the market opening up more broadly is after we start to actually see some sort of movement on the interest rates and we see the broader debt markets really start to stabilize. And the same thing when we talk about the dry powder on the equity side, we also see dry powder on the private debt side where there’s a lot of lenders that are starting to say, hey, I want to get aggressive to try to get some transaction volume, even in a slow market. So we’re seeing them start to tighten their spreads a little bit and the indexes need to kind of improve a little bit and we need to get a more normal yield curve.
And when we get all that, then we’re going to start to see volumes return, values start to recover between now and then, it will be – the lenders are starting to bring us things and we’re starting to see some interestingly structured portfolios that really were, you saw regional sponsors who didn’t have the wherewithal to raise new capital into their vehicles. And the – just rapid rise in interest rates have essentially, and cap rates have essentially wiped out most of their equity and made it impossible for them to continue to service debt. So we’re starting to see some of that happening with lenders, but we haven’t seen it in any large volume. And I think it’s going to take another, just like you saw with the GFC. I think it’s going to take the next 18 months to 24 months for that to redisperse itself into the market.
