Yet Another Value Podcast - Bill Chen on why the opportunity exists right now in publicly-traded Real Estate

Episode Date: October 9, 2023

Bill Chen, a real estate investor and Managing Director at Rhizome Partners, returns to the podcast to provide his latest insights on what's happening in publicly-traded real estate market, private real estate market and literally everything real estate in between. For more information about Rhizome Partners, please visit: http://rhizomepartners.com/ Chapters: [0:00] Introduction + Episode sponsor: Alphasense [1:38] Discrepancy between publicly-traded real estate and private market value / what's going on in REITs [4:27] How does current Real Estate environment relate to similar historical periods [9:26] Bill Chen's current real estate thesis [13:58] Liquidation premium and where we are in the real estate cycle [22:43] Public market trades below the private market - why shouldn't public market real estate trade for discount to private market? [26:45] Real estate diversification, geographic risk and tax breaks [38:38] Running apartments buildings net debt [43:25] How to finance a distress cycle and capital allocation strategies during this time [52:51] Why invest in real estate vs. (for lack of a better term) a lot of other stuff right now [1:01:21] Why Bill Chen thinks this opportunity exists right now in publicly traded real estate Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need, to provide better analysis for you and your clients. As yet another value podcast listener, visit alpha-sense.com slash fs today to beat

FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. All right, hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it mean a lot, if you could rate and review it wherever you're subscribing, watching, listening to it, you know, five stars would be super helpful. With me today, I'm happy to have one. Bill, I can't remember if it's the third time.

or the fourth time. But my friend, the king of public real estate, Bill Chen, Bill, how's it going? Fantastic. You know, good to be on a pod again. Always love chatting with you and getting finally some nice weather here in New York City. So I'm excited. This is the great thing about the pod because you know, you and I, we text, we email, we DM, but it is nice to every now and then you forget like, hey, when's the last time I saw Bill's face and we got to talk about leg day and everything. But we're not going to talk about leg day today. Before we get started, just a quick disclaimer to remind everyone, nothing on this podcast is investing advice. That's always true, but particularly true today because Bill and I, you know, look, it has been a rough time for

real estate over the past month, over the past year, over the past five years. And Bill, again, he is the king of publicly traded real estate. I think Bill is out here saying, like, look, he's got some great stats. I might even be able to share some of the charts on Twitter when I post those people can look for that. But he's got some great sense. And he's saying, look, the discrepancy between private market value and public market value is really high. If you look at history, if you look at the drawdown that you've had in REITs and everything, like now is really the time to be focusing on public real estate and Bill's trying to take advantage of that. And he wanted to come on to talk about that. So Bill, I kind of rambled with the

overview, but I'll just turn it over you. You know, what has happened to public, publicly traded real estate? Why do you think this is an opportunity? What is history telling us all of that? All right. Wonderful. Thank you for the introduction to Andrew. It's been a, this is, you know, as a value investor, this is kind of what I've been waiting for for 10 years. And I just want to give some context, right? I started investing in public markets a lunch upon 10 years ago in 2013. When at most, most, you know, large cap, multifamily reasons that you look at with trading probably in the high three's low force cap rate, right? There was really no excess returns to be had than that time. Fast forward 10 years later, finally the Fed raised rates. And all of a sudden, you know, since, late 2021, if you look at the Futsi-Nay-Reed, O equity re-index, which excludes mortgage rates, we've had a 35 to 37% drawdown on a, not on total return basis, on a price basis. And one of the studies that we did with my, that I did with my analysts, is that every time that there's been a 30% drawdown in the Futsi-Nay-Ry index, since going back to 1970,

the forward returns for the next five years is 109%. So that is a phenomenal setup for stock picking within this space because, you know, my strategy, have my strategy historically has been allocated to real estate. It's been very, very slim picking. You know, I've never looked at large cap public reeds. And now I'm like a kid in a candy store. I mean, I'm just like looking at every single name I look at. I'm like, oh, I could buy, you know, multi-family, some debt multifamily large cap, you know,

clean, excellent balance sheet, no, you know, no worries about debt maturities at, 7% cap rate, right? I could buy net lease. I could buy, you know, like any, really any, any name out there, like any, any of the big food groups within real estate, I get excited about. So this is, you know, the draw, like, we've definitely experienced drawdowns in our portfolio, but like the opportunities that going forward is just so exciting. And you can probably see, you know, you can probably hear it my voice, right? So I want to do, I want to dive into a couple different areas there. So first, again, I think Bill said he's got this great chart on the FTC drawdown. If you're interested in it, I'll post it on Twitter. I think Bill said that was okay.

So you can see this chart, but it's this great chart that goes back to the 70s that shows, hey, as Bill said, every time there's kind of a 30% drawdown, it spikes pretty quickly off that drawdown and pretty hard. I just want to mention one thing on that drawdown. So I think people might think, oh, well, yeah, if you went back to 1980, right? And you said every time there's a 30% drawdown, it spikes up, people might say, yeah, but that's just kind of because you were riding the interest rate curves, right? Since from 1980 to kind of the end of last year, interest rates had always come down or been stable. So people might say, oh, it doesn't work in interest. And I think the interesting thing about this chart is it's no, like the first 30% drawdown is actually from

September 1972 to May 1974. That is a rising interest rate environment. And the REITs, actually the second best bounce that you've got on here. The REITs actually really outperform into that. So I don't know if you want to comment on that, but, you know, I think the pushback here would be, oh, yeah, a lot of it is just, you know, you're in a decline in interest rate environment. Of course, it's real estate, which cap rates are very interest rate driven. Of course, I think there is the 70s example, but I'll just let you take that overall. Sure. I mean, I think there's, there's a lot more to. So, so I think you're very astute to point that out, right? You know, because that period was from 72 to 74 and, and, you know, the rates rise, like kind of going into the, the, the 80s and, you know, peak in the early 80s, right, if I remember correctly. And I think there's a lot more that goes into it. And I've been doing real estate for 20 years between private and public. And there's a lot more because you look at replacement costs. And we'll go into this. I will go into this like through the course of the podcast. It's not just, you know, what's interest rate. It's how much supply can you bring onto the market, right? How much supply can you

bring onto the market? What is the replacement cost of these assets? It's not just, you know, what's a supply can you bring onto the market, right? What is a replacement costs of these assets that you're going to buy? Are they going to be functionally obsolete? Like is this a, you know, is this an asset class that has, you know, a long-term temporal value that will, you know, grow, call it, you know, asset level 2, 3% a year, right? Like, those are all really important factors. And, you know, we're in an environment today where I track a lot of private real estate developers and they are not building that they're not, what they're telling me, you know, there's a lot of antidotes, right? These are all antidotes, There's a lot of them, and there's so many of them that, that, you know, the low or large numbers makes it statistically significant that what they're telling me is that they used to build, they used to build, developed to a 6% cap rate.

They would, you know, cash out refiles, sell it at 4.5% cap rate. And over four or five years, you know, using the financing rate, using what the bank will lend to them, they could get about, you know, over 20% IRA. are using the same project, same return profile, but you raise construction debt, you know, that cost from 5% all into about 10%, and your loan to value goes from 70% down to 60, and your exit cap rate is 5%. So, like, we're not talking about an exit cap rate of, you know, 6% or 7%. We're talking about exit cap rate go from 1 quarter to 5%. Your IRA goes to something like 6 or 7%. And what that tells me is that the developers cannot justify any sort of,

So it's a development because if you could get, you know, as we speak today, four, seven, four, eight in the 10 year, right? Or, you know, five, five in the two year, like, why would you, why would you put up your capital and take on that much risk to just, you know, earn six or seven percent IR, right? Like, it just, it doesn't make any sense at all. So, so, yeah. No, go ahead. Go ahead. I love this. So on the supply side, what we're seeing is, like, you know, there was actually a couple days ago, there was an article in the Wall Street,

was saying that the development starts for apartments have finally started to, you know, permits, you know, new starts have kind of come down by a very, very dramatic amount. And if you look at the expected delivery, you know, going out in 25, 26, you know, that's, you know, there's a year where it's got to just fall off a cliff, right? So as someone who's been in this space for 20 years, both on the public side and private side, this is a super fascinating time, right? Because these assets, if you're able to, by the way, like a little bit of historical context, just two years ago, these Sunbelt multi-families on the private side were changing hands at like a three and a half percent cap rate, right?

And now they trade a seven percent cap rate. And for the non-real estate, you know, listeners to this pot, that's the same thing as something trading at 30 times cash flow to 15 times cash flow, right? I mean, it's a massive rereading. Like it just may sound like just like just like little bit. you know, just three and a half percent, but you're actually taking an asset that trades at 30 times cash flow. Now you can buy it at 15 times. So if I'm just hearing all this, I think one of the cruxes of your thesis, which is not caught in the charts and which wouldn't get caught when

people are only thinking of interest rates, but it's like, hey, look, okay, yes, maybe interest rates rise a little bit, but the interest rate rise over the past 18 months. The cutoff of, I mean, you can, I've looked at the banks very closely. All the banks are shutting down construction lending, right? Like the cutoff of this financing, you can't go do, as you said, we've mentioned multifamily a lot. And I think multifamily is the one you're most attracted to if I'm just kind of reading the Tileys, but you can't go do a, you know, $20 million multifamily apartment with all equity. You need a lot of debt in order to kind of juice the IRA. And the fact that all of this is getting cut down. They're like, you're saying basically, hey, there's no supply coming online.

Like a little bit more over the next 12 to 18 months is the stuff that started two years ago gets finished. But if you fast forward to 2025, the past 12 months. months, especially six months, nothing's been getting built. So sure, you can say, oh, cap rates are going up, interest rates are going up. But if you look out 18 months, there might be a lot of pricing power is kind of what I'm hearing, because that supply demand and balance is going to get out of whack. And yeah, maybe in three years, we get another boom and people start building, but there's a lot of pricing power. Like the earnings are going to go up is one of the things I think I'm kind of hearing from you is something that, again, it doesn't get caught in the charts,

but that is on the back end that will have to settle up one way or the other. So, no, that's, I, Andrew, that's, you, you put that very, very well. And that's exactly right. And just like to kind of, you know, quantify, kind of like, you know, how. So there is a lot of supply being bought online more than, more than historical norms, right, especially in the Sunbelt area. And a lot of those, so a typical multifamily project, probably from the moment you decide to buy the land to when it actually gets delivered and brought on to supply up to the market is probably about four years at this point, right? Like, you know, in the past, in the something that you probably could bring it to market a little faster, but, you know, everything's gotten harder, right? Actually takes it about four years. So if you think about all the projects that are being delivered, you know, 23, 24, or 25. So I think the, this elevated level of delivery is actually a little bit longer than 18 months. It's probably 24, right?

But it really like, you know, really tells off, right? And the thing is, like, the longer that rates stays high today, the more, the more likely that, like, so, like, the literally falls off a cliff, say, in 26. What's going to happen is that the longer the rates stays in this kind of market condition where nothing is approved. Just think about like when they start building, it's got to be another four years before they could bring supply online. So like that's really important, right? That's really important to you understand is that you can't just flip a switch. Like housing is not something that you could just flip a switch and everything just turns on. It's, and there's a four year lead time.

So you're exactly right. Like we like, you know, we are. And, like, you know, one natural question is, like, well, why am I able to buy multifamily at a 7% cap rate in the public market? It's like, like, am I the patsy, right? Like, what am I missing? I think if I learn one thing about public market, Andrew, you could probably agree with me, is that the public market do not want to hold anything going into a period where you either comp flat or comes like negative. Like, there's, you know, the headlines just don't look great. Now, like, our, you know, where I come from, we, we, what we, we, like, people are joking. about like, oh, like, you know, private market strategy or private equity strategy in

public market. But like, that's literally what we do. This is, these are, you know, call it, you know, 100 year assets, right? I'm not got to like look at. I'm not going to look at what's going to happen next year, the year after. I'm going to look at like, you know, what these assets are worth three years, five year, 10 year, 20 years out, right? And I think this is a kind of like a once in a decade opportunity for me to be able to deploy a lot of capital into a space that's, that's, that's trading at a, like, on a dollar per unit, on a dollar per square foot, on a cap rate, on a free cash flow, on a dividend yield. You know, like, you look at all these metrics, but this is, this is like the best that I've

seen in a decade. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. So I'm just taking notes because there's a lot of I want to follow up on there. But let me start with.

So one of the thesis is we can go into different pieces. But I see some of your other slides and stuff here. And we can talk to specific public market second. But I think the overall thesis, and you laid it up, right? If you go private market value right now, if you and I, we threw together 10 or 20 million and we wanted to go buy a apartment building in Kansas City, right, for $10 million, we'd probably pay about a 5% cap rate, right? And we probably, I actually do want to talk about debt and funding everything,

but we'd probably pay a 5% cap rate. And if we go, if you and I went and bought it in the public markets through Avalon Bay or EQR, we can name a couple of different names, we'd pay, a six or seven percent cap rate. And as you said, you might say, oh, one percent cap rate. That's not that big deal. But five versus six percent is actually a huge deal, right? Like that's a 20 percent increase in multiple if you kind of flip it around.

So that is a big deal. I want to push back on that. And I've had you and Hawking's on here a few times that I've always studied your dance around it, but I was really thinking last night about how I wanted to ask this question. So let me try this. The thesis here is this trades below private market value, right? I have two questions on that. the first is, are we falling into, there's just a lot of publicly, or privately traded real estate.

Like, there's, in America, there's thousands of apartment buildings that are worth $10 million, right? There's five cable companies that are worth $10 billion or something, right? And I think a cable company, like all cable companies, I'm using cable, but you could apply this to any public stock. Like, every stock is worth more, John Malone has said every stock is worth more dead than alive. And what do you mean, if you sell them, they're going to go for more than they trade in the public market.

So, you know, a cable company might trade for eight times. And if one got taken out, they'll probably get taken out for 10 times. And the day it gets taken out, maybe all the peers trade for eight and a half times. But they don't trade to the private market value, right? Because they're a public cost. I guess what I'm wondering is, hey, are we just looking and saying, and now real estate is a lot more liquid than a public market, right? You can sell an apartment building to 5,000 different buyers. You can sell a cable company to maybe three different buyers.

So there is more of a liquidation opportunity there. But are we just looking and ignoring that, hey, like public market things just tend to trade for less than their worth in a private market full sale value. So this is super fascinating, right? Because like, like if you go back and I love this topic, right, if you go back to Davis Winston, right, like, you know, the, the, the Yeo Endowment, you know, he coined the term the liquidity premium, right? Like there was a period where if you're poit traded, you're liquid, you deserve a premium.

And we like, turn that upside down, right? like now it's like nobody wants a volatility and you got guys like cliff asness out there saying like you know private equity is basically your volatility launderer right like they laundering your volatility and and like it seems like a lot of these you know everything in the public trades at a discount to private right now i would this is where uh and this is like the added optionality to this return stream right like i think the public tends to overshoot on the way up when things are good it tends to overshoot and then it tends to overshoot on the downside as well right now we're we're trading below right now we're trading below like what the way below what the privates are trading at right and then i i really do think that and because the big guys right like i mean i've been on your pop before i pitch you know frp i pitch you know other like there's these kind of sum of the parts like a little bit cats and dog right like you know frp's like the only liquidity is you know, trade volumes like a million dollars a day, right, versus like I could go out and I could buy, you know, Mid America and at Camden. And, you know, like, I could put a ton of capital like, like, you know, like tens of millions of dollars and it won't like push the price around, right? Yep. There's real like liquidity, like when the market wants to express that trade, there's real liquidity

premium. Like the market will pay, you know, a premium for that kind of liquidity. to be able to go in and out right so so so and and you kind of saw this you saw this in late 2021 when late 2020 coming out of COVID right like when the market decided hey rates are low interest rates are low and we like want that exposure we want to express that trade you know all these reads like you know talk off right and they were like the small caps kind of got left behind so from where I was coming from like I agree with you like some of the small market cap less liquidity a little bit of cats and dogs some of parts dynamic like they kind of especially trades at a discount.

The big guys, like, they could trade at a premium at times. It's just one of the things like if and when, you and I were talking two years ago, you know, nobody envisioned a world where, you know, 10, 20 year treasuries were back up to 5% two years from now, right? And it's very easy to say, oh, for the past two, three years, as you said, if it's a, we know that E-Liquid kind of hire yourself is going to trade it a discount. But, you know, for the past two years, three years has been like, oh, Avalon Bay, New York City office space, whatever.

it is trades for a discount to the private market value. And it's easy to feel like that goes on forever. But Hawkins, who came on and pitched V&O, like one of the things he talked about was, hey, you know, people are like, oh, 10 years up to 4% aren't these office building? Shouldn't they trade at a big premium to that? And in today's environment, maybe, but if you go back to like the mid 2000s, office traded at a 3% cap rate while the 10 year was at 4% or 5%, right? Like they have traded inside the 10 year before. And as you're saying, if you go back and this is before the financial crisis. Look, 20 years ago, you got a premium for liquidity, right? All these publicly trade guys, we traded at 4%. And private market would be 5% and all the private markets, this is why

a lot of them are publicly traded. All the private markets would be like, our one goal is to get big enough and go public and then we're going to get a 20% bigger multiple. So like, it sounds crazy to say this today, but regimes change. Things change. And right now, yes, you're getting a huge discount when you, but as you said, like, could the discount get wider? Maybe, but, you know, it probably shouldn't be this wide. And it wouldn't surprise me if we did this podcast 10 years from now. And you were like, look, now is the time to sell all your public market and go into the privates. Because public markets trades at five and privates are trading at six. Go take advantage of that spread. Well, you know, it's interesting that you mentioned that. And I've seen a few cycles,

right? Like I've seen, you know, I've been involved in real estate post 9-11. That's when my family first started buying into the kind of residential buildings in New York City. I was a city during the GFC, you know, like I was following the market, kind of like coming out of GSC. And, you know, I've been through COVID. So, like, I've been through three really big cycles, right? I have a lot of memories about the market. And it's just when you mention that. Because, like, if you want to get, like, really cute, I would say, like, if your family office or, like, your, you're a large investor and you, like, want to, like, kind of play this the right way, you could, like, allocate capital to large liquid multifamily reeds, right? When that work, that's also your signal.

know, hey, like, maybe you want to take some chips out of the table and do the private trade next. Because on the way down, the private lags, it's been lagging by about, you know, like, because, you know, the public sold off around April last year, right? And, and, and, you know, the private really didn't move. Like, the private's, like, lagging about, you know, 12 month behind, right? So, like, on the way out, like, you know, my experience, you know, my memory of history is that that's got the same thing's going to happen. So, like, they're, like, you could kind of set that up. Like, maybe we're getting like a little bit too cute here.

But like, you can set up where you, you're getting on the publics. That re-rates when that, when that works, like you still will have a lot of capital to put into the private side. Like, that's like, you know, high level, like, you know. I hear you. It's very difficult to pull off. But I do think there is something to like the public markets are very fast moving. And look, to go back, if we were dealing with $2 billion, you know, private equity deals,

they would be very fast moving as well. But when you're dealing with a lot of these apartment buildings, 10, 20, 50 million, not that it's not sophisticated people, but they're probably not as fast on the day to day. So as you're saying, like, the publics might sell off. This public sold off in April because they saw the stock, they saw interest rates going up. You know, if you were a doctor who had been making deals,

making money on these deals, you might not have responded quite as quickly. So as you're saying, like, maybe in July of last year, you could have sold something to them at a three and a half percent cap rate while on the public's it was saying, hey, this is six. Let me go to my next piece of pushback on the, hey, the public market trades below the private market. And this is the other one that really struck me. If you and I went and bought an apartment building in the private markets, right? We could really optimize it in a lot of ways. The first way would be we would put it into a partnership structure, right? And you and I, we'd get all sorts of bonuses. We'd get depreciation. We would not be paying any tax.

on this, right? And now a lot of the public trade guys, yes, they're REITs. So you're not getting the the curse of the double taxation, right, where they're a C-Corp and then you pay taxes on that as well. But they can't pass on all of that depreciation and all that there's tax advantages, their investors, right? They literally just pay out their REIT dividends and then you and I pay the dividend, right? So this does come back a little bit too, hey, things in the public have traded a premium before, but why shouldn't public market real estate trade at a discount? Because it's just disadvantage, right? You don't get the tax benefits. You have to pay tax on the dividends. Like private market stuff kind of should trade for a discount when you kind of think about that.

And just one more thing on that. If you and I bought the apartment building, we would completely control capital allocation. I'll come back to that in a second. But, you know, when we buy into one of these reits, it is a reits that are actually, they're very difficult to go activists on. You're kind of trusting the management on capital allocation. They can't time to sell. You know, so when I wrap that whole thing, I'm like, yeah, like I'd honestly rather just go, not that I can afford an apartment building, but it would be way better for me. I pay a premium to buy an apartment building myself versus to kind of have it in a publicly traded structure where I can't control it.

So I'll toss all of, I threw a lot of that. No, I mean, and look, I love this conversation, right? I love this discussion. And we looked at it. I think the ability to take, like to shield your distribution by buying the building and using, you know, depreciation to shield your cash distribution. like that is the most legitimate you know argument against owning in the public right like that's that's legitimate absolutely now you know outside and then like there's things you could do or like you could like

like if you do sell you could like 1031 it right and then like you kind of like create this perpetual machine right now that that is and and i you know like my family's done that on the private side like you know like i i personally own real estate so i'm totally aware if i ever run for president one of my core tenants is going to be we're getting rid of 1031 because it's absolutely ridiculous the gift that we give to real estate. I understand anyone who invest in real estate is going to invest against me, but we're getting rid of that man. That is so crazy that real estate investors get that. You know, apparently the history started with like, like, like farmers, like 10301 and like cattle. Like it's like like kind of change and you don't want to like, you know, have

some farmer who like, you know, they sell like some young cattle exchange for like some older cattle or like I like I think that's like the history, right? That's interesting. But, you know, I've tried to say, hey, I bought a stock that started, I bought a stock that started with B, and then I sold it and bought another stock that started with B. And they have not let me 1031 those capital gains. So that's, I think, I think that's like, you know, a whole separate topic that that's probably saved for like, you know, a whole different day, right? But let me address. Like, so the tax advantage of, like, owning privacy, like, that's, that's very real, right? Like, and, you know, but if you think about what do you get,

what are the advantages when you actually own it through the public real estate, right? Like liquidity is like a bad word right now, right? But liquidity is a real advantage, like the fact that like in a moment's notice you can get in and out of things, right? Like that deserves a real premium, right? The second part is like, you know, like the actual management of the real estate asset net like, Andrew, like, you know, like it's kind of sounds awesome to sit here and say like, I'm going to go out and buy this. and blah, blah, right? Like, like, I've gotten phone calls from my tenant, like, when a blizzard rose through and the heat doesn't work. And guess who's got to drive in, like, a foot of snow, like, to the place and turn on the furnace? Because, like, you could call people, but, you know,

like, the guy who's going to do that, he's busy. He's got, he's got a dozen calls, right? So, like, I got to go do that, right? And my wife's parents own a few apartments in Utica, New York. So if anybody's looking to live in beautiful Utica, New York, but they're, you know, they're getting older. And I'm always like, guys, I understand, like, this. has created a lot of wealth for you, it generates income and everything. But, you know, how many times is Todi Tubis going to drive to an apartment at, you know, two in the morning because he gets a call from the tenant and they say, hey, the pipes froze, the toilet's not working or something. That is a real headache that as you're saying in the public market, it's like, I don't get calls

from my stocks at two in the morning that say, hey, you know, there's an issue. We're going to need you to drop everything and come in like somebody else is doing that. It's certainly a bonus. Yeah. And then, let's keep going down the list, right? like, so diversification, right? Like, if you, if you buy MAA and CPT, I mean, MAA has got like almost 100,000 units, you know, that's, that's, you know, a ton of buildings spread out over multiple cities, right? Well, you own a single building, but now, if you just happen to own a building, like, where a hurricane comes through in Florida, like, you have 100% loss, like, risk, right?

Like, you have sinkhole risk. You have all these risks, right? it's a great you know everybody loves to buy homes and my pushback has always been yeah like I'm getting all I'm about to have a kid I will probably buy something at one point but everybody says oh it's this great source of wealth generation and okay yes like there are nice tax breaks and stuff but what about think about the people who bought homes in Detroit in the 80s and we're like this is the best like we've got all the automakers here football like we've got all the big four sports teams like this city's never going to go bad and you were probably so far underwater on that thing 20 years later like you're like Like, you take very, like, that is a very real risk. New York City, I don't think, San Francisco apartments would be great. You bought one there. I bet you were killing yourself. And six years ago, you were in like, big tech.

This is the big. New York City, I do still have some worries about a doom loop at some point with, you know, subway ridership down 30% and service getting cut off. But it's just a fantastic point. You get diversification across all of America when you bind to one. No, you could, you could potentially, like, you know, allocate to the run geographic exposure, right? So, like, like, you still got to be careful about that. But, like, I think, I think on the single, like, you know, like, if you got exposures in Nashville, Miami, like, Dallas, you know, Phoenix, et cetera, sort of like, there's, like, there's, like, several hundred buildings.

Like, there's nothing that, like, could potentially take you out, right? You know, at one point, my family put half an net worth in our first investment properly. I mean, that was really scary, right? Something happened to that one building. It was three rental units. if something happened to that building, like, we, we're out of half of our life saving, right? So, so I think, I think that's pretty legitimate. But, like, you know, one thing that people don't really talk about is, like, transaction fees, right?

Like, like, Andrew, like, how much you pay interactive broker to buy a single share, like, a penny? Yeah. Right? A penny. A penny on a $100 stock. I mean, I don't even know. Like, that's not even, that's, like, not even one basis point, right? At least that one basis point, like, it can't do the math right now.

But like, like, anytime you buy and sell real estate, I mean, it's fair to say, like, on a larger asset, like 3% all in transaction costs, right? Now, let's like actually walk through the map, right? Let's walk through the map. If you're putting, say, 60% like 70% leverage, right? If you're putting 70% leverage, which was like kind of what was normal, your equity is 30% of, like, if you buy a multifamily building for $100 million, right? That's the $30 million equity check. your transaction cost is $3 million to go in. At some point you've got to get out, right?

So 10% almost 10% of your equity goes to a transaction fees and you've got to make that up in your return somewhere. You could log into Interact brokers or really like any brokerage that you have. Your transaction costs is one basis point. Like I think Jake Taylor at, you know, Jake Taylor one time on Thanksgiving said something along the line like he's like he's thankful for fractional ownership. ship through the stock market and like it really resonated with me right like it really resonated with me because like you got all these like crypto people running around talking about like

we're going to like revolutionize like like you know real estate ownership and do all this things and like all these protocols i'm like guys it's called reits like you get a fractal ownership like oh this pro call and you know like i think a lot of time people push back on oh you know like these poetry company the CEOs and just like watching out for themselves if anything i've yelled up more like poetry to CEOs, like, and not yell that, but like, I've given them, like, more like, hey, you should

do this, you should do that, right? And I think when you get to, I think like in the deep value world, there's a lot more like, you got to engage with management team. You got to like, you know, really, like tell them, hey, this, you know, like, I like what you're doing here. You don't like what you're doing here.

Like, you really should buy back shares. Like, there's a lot like, you got to really just be a lot more active. The larger proletrator reads, I mean, the shareholder base essentially kind of gave them a blueprint, right? You got to keep net debt to even down, like, below six times, right? Like, can't go over six

times. You've got to ladder your debt maturity. Like, if you look at, if you look at the debt maturity of ladder, right, like the maturity wall of mid-America, it's like space out every year for the next 10 years, very well ladder, right? And

like all the large problem Greeks are just so much better at, you know, all these things. And they understand, like, if they trade a premium, they'll issue equity, go by, you know, privates, right? And, you know, another thing is, like, every private guy that I'm talking about, like, that I'm tracking or talking about, they're worried about surviving. They're worried about, like, you know, making enough payments. They'll worry about, like, you know, do we have enough capital to cover capax? All the big guys, I was at Neary in June, all the big guys are talking about, they're like

rubbing their hands together. They're like, aha, like, we make. have a distress cycle coming up and we want to buy you know like we want to buy from distress developers we want to buy from like people who who has a maturity come through blue maturity come through and they're forced to sell right like and that's a dynamic right so there's the there's the you know like your transaction costs like going in and out like what it costs you like buy an asset sell an asset like it costs you nothing right it costs you like nothing and at yeah no i would just said, like, you very suitly pointed all that out. The other thing is it costs you nothing

in terms of all those expensive, but think about the time. You know, if you and I were going to buy an apartment building, like we'd have to go identify the building. We'd have to work with the brokers. Now, maybe you could say, all right, Bill and Andrew, like, Andrew, you're comparing to do it yourself. You could go work with the manager, but, you know, the manager is going to take, what, 2 and 20 if we work with them. So, yeah, we can outsource a lot of that time, but the manager's going to take 2 and 20. We will get the tax benefits we talked about when he passed them through, but two and 20 is a lot more than what you pay in MAA or like, if I remember quite that they just pay their managers, like, you know, normal managers, they don't get

huge incentive fees that take up 20% of the upside. So you get that. The taxes are, you don't get the tax breaks, but the taxes are simpler, right? You're just going to pay taxes on your dividend, whereas if you go by, you know, if we wanted the diversification that one of these went, we'd have to go buy apartment buildings, what, 10 different states, 20 different states. So we're probably going to have to file state filings in 20 different states like you there there are simplification advantages there not just in terms of the expenses but also in terms of just the time cost oh i mean like uh you know i have a lot of debate with like um certain like private um i think like if you have an organization right where you have real estate expertise you have an a team and an organization right

and this is your expertise right i think like you you you could like do it cheap you have a lot more control but like if you're a passive investor like if you're a family office and you're let's say in some sort of a operate you make widgets right and you want to diversify and have exposure to to real estate like most likely you're going to have allocate you're going to allocate it to a private manager who you know if you think about like there's a one to two percent management fee and then there's a certain promote over hurdle right and then you know there's like the industry has a practice where they tend to tack on there's like construction calls there's some sort of what we're doing some

sort of value ad right there's like a bunch of fees like if you look at a fee schedule of private real estate deals like it could get like like sometimes it get like pretty egregious now there's some really good operators like people that i follow on twitter that are that are very very fair with their fees right but i think the industry as a whole on the private side like the fees that they charge like kind of makes the hedge on the strategies look like choir boys right so so i think what you you look at, you know, we looked at like the MAA is like SG&A expense, right? And the way that I think about is that their SG&A expense is kind of like setting up the infrastructure to be able, they're like 30 basis point of market cap like S&A expense per

year is what provides you to be able to go in and out, right? That pays for the management, pays for like managing all these assets and making all these strategic decisions, right? And, and in that, like, when you compare that to 1 to 2% of, like, management fee, it's actually much, much cheaper, right? I just said 30 basis points versus 1 or 2% and they're going to do 20% incentive fee on the upside. There's probably like waterfall and stuff. But you all in that, I think it's pretty safe to say you're probably paying 15 times more on the private side than the public side. Well, I don't know, because what is V recharge? Just to turn it whatever. Do you know what B recharge is?

I think B-Reed is around 1% or maybe 1.5%. But like B-Reed, I believe, has like kind of like a sales load, like a mutual fund. And that- I think that's correct, too, but I would not stake my reputation on it. Let me just turn to capital allocation. Actually, do you mind if I, like, there's like two other things that I want to bring up. One of it is like your financing costs, right? Like let's say Andrew and I went out to the private market and we bought a building at a 5% cap rate, right? the problem is that like we got to go get new debt at five and a half percent today right

when you buy through the public markets you're buying it's almost like you're getting assumable mortgages right like this is a huge edge like not only are you buying at a 7% cap rate today you get it you're assuming that debt structure which you know a lot of it is is actually about like you know if you look at MAA like their secured debt is is four four unsecured debt is actually three four right like yeah I it's one of you mentioned MAA because I'm looking at their 10 queue right now four million dollars. of debt of fixed rate notes due 2,029,

what did average cost 3.4%. Fixed rate property due 2048, 4.4%. Unfortunately, there's only like 360 million of it. But then, you know... Yeah, exactly. It's like, you kind of have

like a time machine trade, right? Like you're buying into it, you're buying into it at Scent Calf today, but you get to assume the historical, the existing, you know, structure. And, like, on the private side, like, what's like even more nuances is like sometimes like,

every time you do a transaction, the property tax, like the state property tax division, knows what your assets are worth, right? So you get a huge bump up in property tax. Your insurance repriced. When you buy into the public reits, they generally don't reprice, right? This is something like if you really get deep into the weeds, like, you know, a lot of the private guys, like, understand those lines. So these are all the advantages of owning it through the public reads.

so just actually sticking with debt because that's one of the things I wanted to mention with the capital allocation here, right? So sticking with debt. One of the things I do look at and I say MAA, you know, they've got $4.2 billion in net debt

and a market cap of a little over 15 or 15. So let's just say 20% of their EV is debt, right? Yeah. If you and I went and bought property apartment buildings, right? Yeah. I don't think we'd be running these at 20% net debt. Like, correct me if I'm wrong, 50% net debt, 60% net? Oh, it could, I mean, I've seen people go up to like 80, right?

It's like what the bank's appetite are, right? So, yeah. If we didn't fix that, like a lot of the sunbelts are blowing up. We'll talk to stress cycle a second. But, you know, if we did 80% debt and we didn't get a fixed and interest rates go from zero to five, like that's why a lot of these guys are getting trouble. But, you know, just speaking, sticking to the inefficiency, because you mentioned, right, publicly traded shareholders have told these guys, hey, five times. times debt to EBAA, six times debt to EBTA, that's your limit. Don't go above it. And that's great in terms of conservatism, but just going with the inefficiency, like, if I'm competing

against private market guys who are going to slap 60% debt onto something and I can only slap 20%, like, I'm going to get it outbid for everyone. Maybe that works in the distress cycle because I've got a cleaner balance sheet, but it just seems very inefficient to me. Okay. And that's, that's the thing is that, right? Like, you know, the whole Buffett, when, you know, when the tie goes out, you know, who's been swimming naked, right like you know i think like if we fast forward in a few years like it it probably i think we're going to find out that like if you pay a three and a half percent cap rate right for multifamily that's probably not a good idea and especially if you like you know the worst thing you could do

is if you if you borrow using all floating rate debt which like you know there's there's a firm out there called tied equity you know essentially that's how they capitalize uh you know their purchases and they're in the news a lot right and i don't want to pick on them specifically, but there's a lot of the same examples, right? And so, so, you know, this is where, this is what I've always been about in the public markets. And when in an environment where, you know, interest rates, you know, stays the same or actually goes down, right? Like the guys running with 50 to 80% loan to value, like they look like geniuses, right? They look like geniuses because a 2% rent increase, if you put, if you put, you know, 70% loan to value on it, like that, that kind of translates to 6% increase in NOI.

And then you get a multiplier effect, right? Like, you get like a multiplier effect on the on the cap rate, right? Like it could like really magnify itself, right? So, so, you know, we're having like a tie going out moment, right? and yes like like the 20% is is not as attractive right but like it's it's very conservative it's very well protected like I don't know what happens in the next two years but I sleep really well at night knowing that there's no near-term maturity on these companies that's going to take them out they have just like between the net operating income the revolver capacity that they have and you know

the CEOs are like they could they could handle all the maturity's so like the next five to 10 years, right? And that is not like, that's a very enviable position. Now, the other thing that has happened is that rent has actually gone up significantly. So like what I was saying about like, you know, the shareholders telling these companies, hey, you know, you can't like, you know, you should have run with that much leverage, right? Well, you should have with low leverage. But if you look at like, you know, what rent was in 2019 to now, right?

They've gone up like net operating income has gone up significantly, right? So they had a certain, you know, net debt to EBITR metric that's now actually much, much lower, right? So, so, and that's a function of huge, you know, rent growth and huge, you know, NOI growth, right? So there, you know, that 20% is, one, is not the norm, right? It's actually, it's actually an effect of tremendous rent growth and tremendous growth in the NOI, right? So, so there's, like, you kind of think of it, they could probably take that, they could probably take that up to 35. 40% right and and it's just like the recent rent growth has and and and that's like kind of the inherent like they get in the like what are the hidden um um um you know like what one of

hidden um um um uh strength or optionality in these big public rates right i mean they one they could like issue you know take that leverage up buy a bunch of distressed assets right or maybe even like now we're getting to the point where like i personally told some of these CEOs i'm like like, hey, you could buy distress probably at a six cap, right? Your own stock is trading at seven. If you can't find, you know, if you can't find, you know, distress assets, you should just buy back your own shares. They didn't say yes.

That was my next question. So I'll just jump in and ask it. Like, look, there, you mentioned earlier that the CEOs are at public trade conferences and kind of like, hey, we've got clean balance sheets. Like, we certainly weren't swimming naked. We've got clean balance sheets. We're ready for distress cycle. And I guess my two questions on that are how would they finance a distress cycle?

I think you said it sounds like they might just take leverage up, but, you know, my worry would be you go and issue your stock, which is straight into a seven cap to go buy quote unquote distressed at 6.5 caps when all the private markets at 5 and a half. And you're like, well, you just eluded me from my seven cap. That's one. And then number two, you know, none of these companies as far as I can tell are buying back stock. And I not only buying back, but I was just flipping through the only company that even has insider buying as far as I can tell is MAA. They had a couple of small insider buys in August. That prices that were about 10% higher, a director bought, it looks like a couple hundred thousand, so not meaningless. But, you know, I just, I've seen industries where the market is implying distress before and there's no distress. And like, sometimes there's tons of insider buying. Sometimes there's not. But I just look at this and I say, no insider buying, no share buybacks. Like, are we really going to get that like real alpha return if these guys kind of aren't stepping on the gas here?

Yeah, so sure. Yeah, I mean, the, so let me just, so the, you said a lot there, and I had an answer to it, but then, like, lost my thought. Let me see. The, so I, so it's like how they, how they finance it, right? Okay. So, if you look at the payout ratio on the dividends, they're only paying out somewhere between like 67 to 73, like the four, the four big receipts that I, they only pay now.

So there is a ton of capital being retained, right? So they could potentially buy distress, take advantage of distress, just by their free cash flow generation. Okay. And this is, you know, this is net of paying their SG&A and they're paying their maintenance capex, right? I mean, all these have some sort of development like growth capax spent, right? But they have, so there's a ton of cash flow being, you know, not distributed to shareholders. So like, if you look at the dividend yield, you're like, well, Bill, like I'm getting in at like a

four, two, four three dividend. dividend yield. That doesn't seem attractive. But like the actual total, like the total available for distribution is actually about a six and a half percent yield, which is, which, you know, a huge yield for, for REITs, right? They're not paying all that out that, you know, about the third of it being retained to be redeveloped to be, you know, redeploying the district. The second thing is that the capital markets knows, like they, they don't have to issue equity. Like, the capital markets are still open for the big large capital you know large cap rates like if you're looking to buy corporate bonds right like you look at you know these these you know large capital tight families

they have over a billion dollars on net operating income and literally like the net that's even is like four times right and and if you like we stress test what happened to n oi during the gfc you want to take a guess like how much the sunbelt multifamily reads like how much the n oi drop when during the gFC during the gFC sorry I thought you might have said

a bit uh yeah I had two percent three percent I guess it's not really big like no like like like it dropped like at most about

5 percent right and then it like so unemployment went from about four and a half percent up to 10 percent and then the kind came down a little bit right

and and so like you have you have that like probably one of the most stressful time periods in you know in like the US the world financial history in recent times, right? And NOI for, you know, like something like, for a company like

mid-America only dropped by 5% like, you know, like, you know, from start to like the absolute trough, right? And then within like two years, like, exceeded like the previous benchmark. Now, Avon Bay got hit harder because they have more exposure to New York City, which is like in the center of like, you know, mortgage packaging and like California. It was like, so like, like, like, like Alvin Bay, I think it was like down, you know, met to high teens and a lot, right? So, but like, what I mean is that, like, the California. Capital markets understand that these are, these are, essentially that bonds, right? These are bond-like vehicles.

These are bond-like instruments. And they understand that, like, if they're carrying four-times net debt to even add, like, capital markets are willing to give these companies, like, another billion, another $2 billion, at probably, you know, when I was talking to CEOs back in, you know, in June, they were saying the price is 5%. Now, you know, 10-year-year-year-old has gone up a lot since then. maybe you tack on 6% right like so it's like well why would these guys like go issue new debt at 6% go buy something at a 6% cap rate I think it comes down to hey you know a 6% fixed rate debt you know stays at 6% but you know if you buy multi-family over 10 years you're gonna have some real asset appreciation real cash flow growth right and that comes back to what we

started like one of the original things we said right where yeah right now over the past 12 months the supply is getting cut off and you won't see you won't see that popping up today really you won't see that popping up next year, but two or three years from now, you could have a shortage. And as you said, if you buy it 6% now, you finance some 6% debt, A, you get the tax deductibility of the debt, which is always nice. But B, you know, in two or three years, you could really start seeing some really nice growth. Obviously, you should, even without that supply-driven shortage growth, you should just get inflation growth, right, which you should tack on one, two, in 2022, nine, who knows,

percent growth. But just to go back, the lack of insider buying and the buybacks. I just want to address those real quick. Yeah, I mean, I think, like, at the, at the large, you know, at the large cap reeds, like, I don't, I don't view that as, like, a strong signal one way or another. Like, like, I think, like, in some of these smaller companies, like, you, like, you know, I view that more of a signal. And, uh, I'm, I'm going to trust, like, my own experience here and my own gut that, like,

reed buybacks generally is not, it's just like very, very rare, right? like reed buybacks is like very rare and if you like own a company if you own a reet and and and the management team stock buying back that is like that is a major major bullish signal right now it it's it's just like magnify probably 10 times of like a normal operating company because like reeds are not set up they're more set up to issue to issue equity than then then to now if they issue it at the right operate and right multiple like it could be very very creative right so And so generally, like, you know, just generally don't buy back shares, right? And in terms of, like, if you're a $15 billion, like, market account company where, like, you're not the founder, like, you're, like, a C-level executive, like, you're really making your returns.

I mean, I know, like, from, from, like, a deep value, value investor perspective doesn't, like, this isn't, like, a satisfactory answer. But the reality is that, like, hey, these are stewards, like, these CEO, C-level executives are kind of there to, like, like, you know, manage, operate, right? Like, they're like asset level of managers, right? Like, like, whether they buy stock or not buy stock, like, like, I'm not going to pin like my, you know, my investment decision on whether they do that or not. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions.

AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-sense.com slash FS today to beat FOMO and move faster than the market. That's alpha dash sense.com slash FS. No, I certainly hear you and I'm just flipping through the Avalon, sorry, the mid-American apartment community's proxy. I'm like, look, the CEO, he owns $50 million worth of stock. He gets paid about $8 million a year, of which, you know, $7,4 million of stock comp and $3 million is non-equity incentive to pay. So his base salary is less than a million. So he's pretty motivated. He's got a stock motivation. It's just, it's a little disappointing

to me where, you know, you see these guys. Yeah. And this is, I think you and me as value investors who like, we make our money because we own the stock and the stock goes off. Like, that's the only way we make our money. I do think there can be something like, hey, you're a financial guy. Like, yeah, you want everybody to spend every dime they make on the company being on your side. Like, he is probably pretty properly motivated. But, you know, it's just one of the, those things that's well and true Andrew I mean here's another stat that's crazy for you right like like like you say like you know a lot of returns come from like the the stock going up right like so another stats that we looked at is my my analyst and I went back to 1970 and the total return

the total return because reeds pay a higher dividend right I think I think like the total price returns is like 1970 might have been like like seven times but the total returning like the price return might have been like seven times with the index, but like the total return was actually 200x because of all the dividends that you got. You know, the S&P generally is below 2% dividend yield, right? And right now the REIT dividend yield is hovering probably around 5%. So like a little bit of dividend goes a really, really long way towards your total return, right? So there's like a different way of like, you know, becoming wealthy in Reed and real estate game. So I'm glad you mentioned total return and the S&P and REIT dividend, right?

So that actually is the last area I wanted to. Now, obviously you are, you're saying like, hey, this is the time for real estate right now, right? And it's when we started, you mentioned the last decade. Like I had a tweet. It was almost we've had a last decade, but the stocks are up a little bit over the last decade. But for publicly traded real estate, it's been like a lost half decade, right? Yeah. The VNQ, which I think is a decent proxy, is up 12% total return over the past.

five years, not annualized 12% total return. You actually would have done better parking your money and T bills. But my pushback there would be, hey, Bill, I understand what you're saying, but we are talking public markets, right? And guess what? You know what's underperformed the VNQ? The IWM, the Russell 2000 over the past five years, the total return is 10%. So both of them, the annualized return rounds to 1%. But IWM is actually a little lower. So I guess my last pushback here and then I want to talk a couple individual names and then we'll run it. My last pushback would be, hey, I understand, okay, maybe publicly traded real estate looks cheap against private market real estate.

And I'm not asking, I'm not asking in terms of, hey, can you and I go find if we spend all of our time one stock of the thousands of stocks that is not real estate that is, you know, more undervalued than just publicly traded real estate in general. I'm just asking the opportunity cost of real estate versus we can invest on a lot of other stuff. you know why real estate versus you know the rustle in general or we could go to MLPs which take oil and gas for us but you know those shield but those have some pretty juicy returns like yeah why specifically private real estate versus I know you look at stuff other than real estate too versus just kind of the general overall equity indices sure so I think

the um there there's a few there's a few uh reasons right number one I think the most important and we didn't like really get into it is that like we have internal models on like what the expected returns are going forward buying something like an MAA and CPT, right? Like if we, now your exit cap rate assumption is a huge deal, right? So let's just go through them. Let's go, let's test them. If, let's say we're talking four or five years from now and the exit cap rate actually

is a seven cap, which like to me is like absolutely bashed, you know, like absolutely insane because you know we can't build housing like like if that's the exit cap rate like nothing's got to get built right nothing's going to get built ever again in that sense so that's a pretty draconian and all the private guys like when the debt comes to you like they're they're going to have like to give the keys back to the bank like for the most part right that's that's the world that we exist right the iR in our model for something like a camden or mid-america will be about somewhere between 8 to 9%. So right now, a lot of these guys, we're buying them at a 7% cap rate.

And what you're saying is, hey, if we exit five years from now at a 7% cap rate, the IRR is 8.5% to 9%, which, you know, that is basically the IRA for equities over the long term, right? So you're saying, hey, with what you think is pretty draconian assumptions, because as you said, at 7% cap rates, unless something changes a lot, like literally nothing's going to get built, right? we will have a lot of NEOI growth on the back end, you would do pretty well at this point. You've kind of obviously better, yeah. I mean that's not what I shoot for when I make my real estate investments, but like given like if that's the exit scenario, right? And like let's break down like why that is, right?

Because like we're getting in at a free cash flow yield of like six and a half percent roughly, right? you're getting like your you're kind of like four three four four in dividends so you're taking that you're putting it in your pocket and they're you know like we're modeling rent to actually like net operating company actually go down about two percent next year and then they increase so like we're only modeling one percent in oh i k are between now and the next four years like fairly draconian stuff right and like i i feel comfortable if we say in this environment rent growth like you know post 2026 could very easily be like four percent a year for like a really long time right so you know there is a little bit of leverage right there is a little bit of leverage like there's

like 20% leverage right and then there's like asset appreciation there's there's going to be like cash bill you know these companies do develop their own projects right so you have NOI growth from the internal development of some projects right and like you you kind of look because like you buy it a six and a half you know you get a little bit of growth you get you have a little bit of you know 20% leverage and that's how you get to like kind of 8, 9% IOR right and if like because you're buying at like a seven one or seven two in MAA like you actually got a tiny little bit of cap rate compression like you know some of the other ones like you don't right uh but like here's the thing wasn't that long ago when multifamily cap rates were three and a half percent four

percent like you know like like you know like I've shown you a chart from CBRE a lot of these multifamily trade you know in the past you know decade and a half trade at like you know low force cap rate right so we're not going to use low force we use a five percent like a five percent exit cap rate at today's price on a four-year hold, you're getting total return of like 18, 19, you know, 20 percent. Like, Andrew, what is not great about, like, here's the thing, okay, you go buy MLPs, all right? I don't know how much, like, land there is. I don't know, like, I don't know how much like oil and gas is there underneath it. I don't know, like, you know, what's going to happen to, to oil and gas in 10, 20 years, right? But I do know people

need a place to live, right? And if anything, like, we're not building a lot of single family homes either right like there's there's like chronically like you know chronically have like housing shortage in the u.s like i i'm very confident that 50 years from now people still need to you know like these assets are not going to become obsolete like you know like the office right like i don't know what the office look like in 20 years right but like i know with multifamily like people will still need the multifamily like the terminal risk is so low here we kind of went through the gfc like how much that N.I decrease, right? Like, 5%.

Like, what other asset class gives you that kind of, like, like, if you, if you look at multifamily and you, you, like, remove, like, real estate of multifamily from it, right? And you say, you get to buy an asset that has, you know, 60% EBIT of margin. Like, what kind of multiple, right? Like, you get 60% even margin and EBITDA only drops 5% to the GFC. Like, what's a right multiple for business like that, right? So like we, we, so like you're underwriting to somewhere between like a 8 to 9% to like a 20% IRA, like in a very draconian to like a normal exit assumption, right? You're getting paid to wait, right?

And let's say we buy it and it and shares go down by another 20%. Guess what? Like in that environment, your IOR like on a four or five year cycle actually improves by 1% IR. Like we run that analysis, right? like in a way you want to buy this you kind of want it to like sell off because you can kind of create your own tax inefficient buyback right so there's your answer Andrew you want buybacks you got the dividends you could do the buyback yourself right yeah it's certainly true I I do I do like you say like you you want to go down because you know we all want it's funny when stocks are growing up we're like God I just can't wait for the 20% pullback and you know just judging by my Twitter feed and maybe somewhat my own personal in turn I was like when the 20% pullback comes you're like god damn it i hate this this is the worst but it's true and like one of the interesting things that not to get too wonky neither of us are tax advisors but as you said like i i think people are worried oh what if interest rates go up more and the stocks go down it's like okay yes that can

happen i don't think that changes any of the long-term math bills doing it it's actually going to probably make the supply side worse on the back end but one of the great things about that is let's say you went and you're like ablon bay is my pay you know i i'm just choosing them I love the properties. I get a little bit of New York exposure. I think New York's going to come back. Love the management team. Stock goes down 20%.

One of the great things which you could not do in private markets, but you could do where you'd be like, you know what? Taking the short term loss and I'm throwing it over to EQR. And again, not tax advice, but that's a very common strategy. That's something that you don't get when you're in the problem. Last question. And then we're wrapping up. I wanted to go into individual stocks, but we're running long.

And I think we have like address a few individual ones. And you know what? People can reach out to you and get the whole. the full spiel if they want to let's just i mentioned a lot of different things in this podcast and if i tip myself in the back i thought about it i thought this was going to be a fun podcast and i've really enjoyed it but i think i asked some great questions if i can tip myself in the back oh you you're putting this together right what do you think is the overarching reason like this kind of opportunity exists are people just burned out on real estate are people really worried about

interest rates do people just not understand the private to public market math like what do you think is the overarching reason that's getting this reason because i have my suspicions but i'm curious to hear yours. I think that the personal opinion, right? Like, I think that, you know, like, if you want some bill of exposure, like, some of that near-term supply, right? And, like, how many times have we shared an idea of people like, yeah, but I don't

want to, like, buy in front of that. Like, if I know that there's all the, you know, the supplies come in, like, you have a supply situation for the next, like, you know, 12 to 24 a month. Like, do I really want to buy it? And my take it's like, look, at a seven cap, I'll, I'll buy it, right? And the dividend, right? The dividend. And this is like, this is like, you know, so much of like what Buffett says is like,

know what an asset is worth, right? Like know what an asset is worth. But like not every market participant like, you know, like thinks that way. I get a lot of self-side research notes and they're like, stick to the coastal, right? Stick to the coastal. There's like less of a supply issue, right? You don't want any sum belt exposure right now. And so I think that's a big reason.

And I think also people, people's memories are kind of like short term. Like there's probably the guys who were kind of running around saying the 10 year was at, you know, 1%. You could buy, you know, the public REITs trading at 3.5. Like that's a 250 bit spread over the 10 year, right? Like that's just a thought. Or probably the same people say, you know what? At like, you know, when the 10 years at 4.8, you know, these weeks deserve to trade at a 7 because it's about 220 bibs spread over the 10%. year right like you know i'm like hey i rather like to buy in at like you know like double the absolute

cap rate i'd rather buy in on an absolute basis at a seven cap versus three and a half because it gives me the optionality if interest rate do go down if you know if this fear goes down like you know when you're near zero there's not a lot that you could you know like there's not a lot of like cap rate compression left right like when you're starting at seven there's a lot of option that have future cap rate compression. One of the thing, I'd be curious, do you think about interest rate hedges at all here? Because I personally, actually, I kind of think interest rates have, people have lost their minds a little bit.

And if you put a gun to my head, I'd say, hey, I really don't want to make this bet. But if you put a gun to my head, I'd actually guess that long-term rates come down. Like, as you and I are talking, where it feels to me like, when you've got the CNBC headline, like every day, interest rates going up again. Like, it feels to me like you're due for a little bit of a reversal, but I don't want to take that bet. think about interest rate hedging here at all just to kind of isolate the bet um i mean so so and we've written about this like in early 2020 right so like we we're like one like you know we actually

short it that um going into 2022 like 35 percent of our portfolio was actually short fixed income right uh short like we were short tlt at 150 it's like you know we covered 115 i mean that's gone down to like 85 it's gone down so we were short like very long term corporate bonds like like i know I remember some logistics, some logistics and warehouse assets that we talked about. I won't name them individually. But you were like, hey, these are trading at 2% caps, like way above replacement value. Like, this makes no sense. Yeah.

So, yeah, those two. So, so like, like, I think when you invest in READs, like, if you don't think you're in the interest rate game, like, you may get a rooted in awakening one day, right? Like, everything. With stocks, it turns out, right? My issue with it always with stocks, not REITs, because REITs are very much. My issue with stocks was if you short, TLT choose, right? And you go into a crisis, you actually have the worst of both worlds because what's going to happen? Interest rates are going to drop and stocks are going to drop.

So you're going to lose money on your TLT short and you're going to lose money on your stocks. And that's the absolute worst of all worlds. Whereas, you know, I always think, hey, you know, if interest rates go up, stocks probably go down because interest rates are financial gravity. It's just a tough trade to play. And that is not REIT specific. Reets are very interest rate sensitive. So you could probably make that work. But on the stock side, yeah.

Yeah. No, I mean, you're absolutely right. And I think last year was the first year where both stocks drop and the 10 year treasury. Like if you, because like, you know, I believe it was Ray Dalio who was like famous for like going into 2008, right? Like that 6040 allocation and, and, you know, I think I don't even know what I'm trying to call. But like, you know, the 10 year, the 10 year portfolio really outperform and buffer a lot of drawdown on the equity. And last year was one of those really weird bizarre years where that strategy didn't work because your 10 year, your tech, like your treasury is like backfired as well, right? Like if anything, the TLT drawdown, I think may actually have been more.

The 20th Treasury ETF like drawdown has actually been more than the S&P 500 last year, which is like a very, very, you know, weird than that. But like, you know, like I, so first is at seven cap. I don't care about interest rates anymore, right? Like, like, if interest was a word to go up, right? So, so, like, I don't think you need to have a shrunk interest rate opinion, right? Now, if you ask Bill, do you have an interest rate opinion? I would say that if you look, you know, there's a, I want to get a shout out to Adam Pettenkin, right? Like, well, maybe you should get a pod one day.

I've tried. I've tried to have him on maybe one day. I'll send us to him like, hey, listen to Adam's a mutual friend of ours. Like, hey, listen to Bill. Listen all the way through because we were trying to get you on. Yeah. Adam has showed me some research where, like, you look at what fees into the CPI, right? And 40% of it.

Now, Adam could have explained this way better than I do, right? 40% of what fees into CPI is actually housing, is actually housing, right? So, like, on one hand, like, I'm sitting here. I'm like, I know there's a lot of supply coming, like, you know, on the multifamily front. So 40%, you know, that's like single family and also. also like on the rental side right like it's combination i'm like i know 40 percent of it is actually got to go like flattish or or like even maybe trend down a little bit so like if you look at if you this like if you if you know like the cpi number of 40 percent of it is

got to be like zero maybe like negative one to like positive one like feeding into it for like next two years like i would like like on a probability basis i think that i think that like the you know, the odds of like the CPI, like getting to arrange what the Fed is comfortable, like is actually pretty good, right? Well, I, you know, my, my issue with the calls for this have generally been, I don't even think this is a controversial opinion, to be honest with you. Like, I do understand for a while, like, 2020, some are people like, oh, we've completely lost control, but like a lot of, as you said, like, the housing stuff comes in on a lag and not

just in terms of the supply, but even the way the Fed runs it comes in on a lag. And, you know, yeah, there's going to be energy, but the health care stuff. And yeah, I just, I just don't even think it's controversial opinion. You can look at like the real-time CPI stuff. And we're down to two, two and a half percent. And I'll tell you, this, it does, it does kind of feel like we're hitting recession right now. Like, some of the real-time indicators seem like they have hit a wall. Like, if you get a recession, guess what?

Not only, I think CPI has already solved, but CPI is really solved. But probably now they're here, near that. Anyway, Bill, I actually am going to have top in a second. And so I'm going to wrap it up here. Fourth appearance, Bill, this has been great. This is actually, I will tell you, it's been one of the most fun and entertaining podcasts I've done. All my podcasts are like my children,

my currently non-existent children. I love them locally, but it's been a ton of fun. I really appreciate you coming on and looking forward to having you on again in the near future. Oh, and I'll include a link to Bill's Twitter handle in the show note. So does that work so people can just DM you if they want to kind of get in the world for you get everything? And also, like, if people want to get in touch with me, my email is Bill. at rhizomepartners.com. That's Bill at R-H-I-Z-O-M-E Partners.com.

You know, DMs are open, email's open. Don't even need the Twitter DM can get there directly. But, yeah, again, Bill is deep and heavy into the real estate. So if you're interested in the opportunity, probably should reach out to him and talk a little bit more about it. Anyway, Bill, had a great time. This is a ton of fun. We'll chat soon.

Okay. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.