THE ROLE OF REAL ESTATE DEBT IN A PORTFOLIO

By Fortress Investment Group LLC

Over the past few years, volatility has become a defining feature of the market. Investors have had to navigate repricing of assets as interest rates moved higher, ongoing geopolitical tensions, and swings in AI-driven sentiment. Against this backdrop, lending against tangible, high-quality real estate may offer a real advantage.

Real estate values peaked in 2022 before falling roughly 22% over the next two years1. Much of the debt originated during the ultra-low rate environment of 2015 to 2021 is now coming due, and borrowers are refinancing at meaningfully higher interest rates. As a result, we see disciplined lenders underwriting new loans more conservatively, meaning today's loans are structurally stronger from the outset. We believe lenders who have kept capital on hand and built the ability to move quickly are well-positioned to take advantage of an attractive entry point.

It's worth remembering that real estate lending is credit, not equity. A real estate lender is not buying the building, so one’s returns don't depend on whether property values rise or fall. Instead, one underwrites the property itself, the cash flow it generates, and the borrower. Real estate loans sit at the top of the capital stack, senior to the equity, meaning the property owner absorbs losses first and acts as a buffer that protects the loan.

In addition, we believe today’s lower property valuations means loans are being made on a more conservative basis: less leverage, stronger protections for lenders, and a larger equity cushion to absorb losses first. In our view, that translates into a real opportunity to lend against institutional-quality assets on more favorable terms.

Why Multifamily

Multifamily, in our view, stands out as one of the more compelling opportunities within real estate credit today. The U.S. housing market is estimated at $50 trillion in value and suffers from a chronic shortage of housing units which continues to impact demand2. Compounding this, a large share of existing homeowners are effectively "locked in" to favorable pre-2022 financing: over 65% of mortgages carry rates below 5%3.

Because these homeowners have little incentive to give up historically cheap financing, the pace of new-home supply continues to lag behind household formation, keeping the market structurally undersupplied, and driving demand for multifamily options.

The Case for Real Estate Debt in a Portfolio

• Attractive Income: Real estate debt offers compelling income, typically structured as a spread over a floating base rate and paid out consistently through contractual interest payments. This provides investors with a steady stream of cash flow, further supplemented by origination and exit fees.

• Inflation Hedging: Real estate debt carries structural characteristics that can help cushion a portfolio against rising prices. Underlying property cash flows have tended to move upward alongside inflation, and because most real estate loans are floating rate, income can rise as rates rise. On the downside, interest rate floors and other structural protections can help preserve yield if rates fall.

• Diversification: Real estate lending spans a broad mix of property types — multifamily, industrial, retail, hospitality — and a wide range of U.S. geographies, allowing lenders to diversify exposure across sectors with distinct demand and supply dynamics rather than concentrating risk in any single property type or market.

• Low Correlation: Real estate debt has historically shown low correlation to core bonds, U.S. equities, and public REITs. Its returns are driven less by the forces moving public markets day to day, such as geopolitical headlines, AI-driven sentiment swings, and central bank policy shifts, and more by the steady, contractual cash flows generated by the underlying loans.

A Favorable Lending Environment

The events of 2022 – 2023 (interest rate hikes, regional banking crisis) resulted in many traditional lenders pulling back from commercial real estate lending. This dynamic has created a real financing gap, and an opening for experienced private lenders to step in where banks cannot, in our view. However, selectivity matters in this environment. We believe lenders with a long track record of origination, deep sector expertise, and experience navigating multiple credit cycles are best positioned to identify the strongest opportunities. The goal is to deploy capital selectively, targeting high-quality assets, conservative leverage, and an attractive basis.

IMPORTANT FOOTNOTES

* Source: The data on the prior pages is represented by the 10-year period ending December 2025. U.S. Equities is represented by the S&P 500 Total Return Index. International Equities is represented by the MSCI ACWI ex US Net Total Return Index. Private Real Estate Equity is represented by the NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE) Index. Publicly Traded REITs is represented by the FTSE NAREIT REIT Total Return Index. U.S. High Yield is represented by the Bloomberg U.S. Corporate High Yield Total Return Index. U.S. Bank Loans is represented by the S&P UBS Leveraged Loan Total Return Index. U.S. Treasuries is represented by the Bloomberg U.S. Treasury 5-7 Year Total Return Index. U.S. Core Bond is represented by the Bloomberg U.S. Agg Total Return Index. Corporate Private Debt is represented by the Cliffwater Direct Lending Index. Private Real Estate Debt is represented by the Gilberto-Levy High Yield Real Estate Debt Index (G-L 2). For illustrative purposes; past performance not indicative of future results. Correlations are calculated based on quarterly data and measures the degree to which the two investments move in relation to each other, ranging from -1.0 to +1.0, over the specified period. Diversification does not assure a profit or protect against loss in declining markets. Metrics and performance information herein do not relate to Fortress but instead reflect Fortress' beliefs about the market generally.

Index performance is presented for illustrative purposes only and is subject to limitations when used for comparison or other purposes, including differences in the number of investments, recycling or reinvestment of distributions, and asset types. It is not possible to directly invest in one or more of these indices and the holdings of any strategy may differ materially from the holdings of any such index in terms of levels of diversification, types of securities or assets represented and other significant factors. Indices are unmanaged, do not charge any fees or expenses, assume reinvestment of income and do not employ special investment techniques such as leveraging or short selling. No such index is indicative of the future results of any strategy or investment.

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Index Definitions

S&P 500 Total Return Index is a market-capitalization-weighted index tracking 500 of the largest publicly traded U.S. companies, serving as a key benchmark for the U.S. stock market and economy. The Total Return version reflects the reinvestment of dividends.

MSCI ACWI ex US Net Total Return Index is a market-capitalization-weighted index representing large- and mid-cap equities across developed and emerging markets outside the United States, covering approximately 85% of the investable equity opportunity set in those markets. The Net Total Return version reflects dividends reinvested after withholding taxes.

FTSE NAREIT All REITs Total Return Index is a market-capitalization-weighted index tracking all tax-qualified REITs listed on major U.S. stock exchanges, serving as a broad benchmark for the publicly traded U.S. real estate market.

Bloomberg U.S. Corporate High Yield Total Return Index is a market-value-weighted index of USD-denominated, fixed-rate corporate bonds rated below investment grade, serving as a broad benchmark for the U.S. high yield bond market.

S&P/LSTA Leveraged Loan Total Return Index is a market-value-weighted index tracking the largest institutional leveraged loans in the U.S., serving as a broad benchmark for the senior secured loan market.

Bloomberg U.S. Treasury 5–7 Year Total Return Index is an index of USD-denominated, fixed-rate U.S. Treasury securities with remaining maturities of five to seven years, serving as a benchmark for intermediate-term government bond performance.

Bloomberg U.S. Aggregate Bond Total Return Index is a broad-based index of USD-denominated, investment-grade, fixed-rate bonds including Treasuries, corporates, MBS, ABS, and CMBS, serving as the primary benchmark for the U.S. investment-grade bond market.

Cliffwater Direct Lending Index (CDLI) is an asset-weighted index tracking the unlevered, gross-of-fees performance of U.S. middle market corporate loans held by Business Development Companies, serving as a benchmark for private corporate lending.

Giliberto-Levy High-Yield Real Estate Debt Index (G-L 2) is an index tracking the performance of high-yield commercial real estate debt investments including mezzanine loans, B-notes, second mortgages, and preferred equity, serving as the first third-party benchmark for high-yield CRE debt.

NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE) is an equal-weighted index tracking the net returns of open-end commingled real estate funds pursuing a core investment strategy across diversified U.S. property types, serving as the primary benchmark for institutional private real estate fund performance.