In today’s credit market, we believe that credit managers should seek yield with optimal architecture around it. As credit markets become more liquid, efficient and accessible, excess returns tend to decline. While capital is good at finding obvious yield, we believe outcomes depend more on how risk is sourced, underwritten, documented, collateralized and controlled, and railcar leasing is one such area that fits these criteria.

As industrial demand for transporting essential items across the US and the rest of North America grows, supply remains constrained as the North American fleet continues to age and railcar deliveries from manufacturers have declined due to elevated manufacturing and financing costs.¹ This dynamic has provided support for leasing rates, and we believe this is likely to persist because supply is likely to remain constrained as demand continues to increase.

With contractual credit-like cash flows via lease payments from high quality counterparties, railcars represent an asset that offers a stable income profile similar to some higher grade fixed income securities. Furthermore, these income streams have historically exhibited low correlation to traditional financial markets while maintaining resilience across economic cycles.²

While the environment is supportive of railcar leasing, the two primary investment-risk exposures for railcar lessors—which affect both their cost of capital to finance equipment and potential risk-adjusted returns—are lease-counterparty risk and residual value risk. As a result, we believe that scale, risk management and operational knowledge are key to successfully taking advantage of the opportunities available in railcar leasing.

While higher borrowing costs and economic uncertainty moderated housing activity during the second quarter, we believe the environment remains attractive for specialized providers of residential real estate credit.

Demand continues to outstrip the supply of housing as household formation is still outpacing housing starts.¹ Reversing this imbalance may require significant development of new housing over an extended period, underpinning the need for off-balance sheet financing for homebuilders to acquire and develop entitled and permitted land.

At the same time, the inventory of existing homes for sale remains below the level generally associated with a balanced market.² With 69% of homeowners carrying mortgages at or below 5%, the “lock in effect” continues to limit the number of existing homes available for sale.³ This highlights the need to build additional housing and to renovate the aging stock of existing homes.

Moreover, the median age of owner-occupied homes now stands at 42 years, which supports demand for renovation capital because many of the homes that do change hands require substantial improvements prior to resale, creating opportunities to provide capital to experienced developers in supply constrained communities.⁴

Housing conditions remain highly regional because we do not think slower national transaction activity necessarily implies weak demand for move-in ready, appropriately priced homes in desirable neighborhoods. By focusing on experienced developers with deep knowledge of local markets characterized by favorable household income trends, population growth, limited supply and relatively low days on market, we continue to differentiate the opportunity set as a "market of homes” from a single "housing market."