Upside Avenue, a top crowdfunded real estate investment trust (REIT), says it has suspended investor redemptions, making the decision to increase the company's cash positions as the fallout from COVID-19 becomes more apparent. The company invests in multifamily real estate and says this move should give it "some protection from unpaid rent or losses" that it could face as much of the U.S. economy remains idled under efforts to control the spread of COVID-19.
Upside Avenue owns both equity and debt investments in multiple apartment complexes, and expectations are that its mezzanine debt investments should continue to generate cash flow, but rent incomes are at risk due to the faltering economy. More than 22 million Americans have filed for unemployment over the past four weeks, and it is expected that millions more will file in the weeks ahead.
Relying on experienced management to navigate the cycle
Upside Avenue is not the only crowdfunded real estate platform to make a similar move. Fundrise, one of the giants in the space, announced it was also suspending redemptions and temporarily pausing new investments several weeks ago.
In a blog post about a month ago, Upside Avenue described itself as being "in a strong position to weather a recession" and pointed out that its parent company, Casoro Capital (with whom it shares its key employees and executives) has invested in multifamily real estate for more than 17 years.
Should investors be concerned?
These are unprecedented times, and even multifamily real estate, a property type that typically weathers economic downturns relatively well, is more at risk than usual. As mentioned, tens of millions of Americans have lost their jobs in the past month, and millions more are expected to join unemployment rolls in the weeks to come. That could impact the rents Upside Avenue earns from some of its properties.
Moreover, one of the things we called out as a concern in our review of Upside Avenue was its use of debt. Upside Avenue can use up to 70% debt to acquire properties, a higher level of leverage that gives it a smaller margin of error. That risk could be exacerbated by the unprecedented nature of the coronavirus recession. But with that risk noted, Upside Avenue does have a talented and experienced management team that knows its business very well.
Suspending redemptions to preserve cash in this environment is a sign that management is using that experience to make sure the REIT will be better prepared if market conditions continue to deteriorate. Lastly, even though the REIT only invests in a single type of real estate, it's a category that should prove on the safer end, even in this environment. With a double-digit count of properties in the portfolio, there's some diversification that should help Upside Avenue weather the economic storm.
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