Finding Higher Risk-Adjusted Returns: Why We Invest in Dislocations

Our investment strategy is focused on capitalizing “dislocation” opportunities. What are they?

Market dislocations are circumstances in which markets, operating under stressful conditions, cease to price assets correctly on an absolute and relative basis. Translated, this means assets perceived to be “higher risk” are priced lower because both equity investors and mortgage lenders require higher rates of return on their respective capital for this higher risk. Property types going through the most dislocation as a result of the COVID pandemic are hotels, retail and office.

For example, as a result of COVID, there is currently a negative perception of office and retail assets as being increasingly risky versus stronger performing apartment and industrial assets that can present market dislocation opportunities. There could easily be less risky retail and office investments with strong tenancy that could get priced lower (at higher returns) due to this macro perception of risk. This creates a great arbitrage opportunity.

We love when we see lower risk in a given property than what the market is pricing because we achieve higher returns in exchange for the lower risk. This is called an asymmetric risk-return relationship in which the returns outweigh the risks, or the upside is greater than the downside.

Our ability to price this risk differently is driven by our mixed-use capabilities in looking at property value in multiple ways. It is further driven by a focus on local SoCal markets where we have been operating the past 6 years, in addition to 10 years in my prior corporate role.

We will go further into the type of dislocations we invest in the next post. Feel free to reach out if you would like to learn more about our investment fund strategy.