Ryan Dobratz - Real Opportunities

Ladies and gentlemen, welcome to the Business Brew. I'm your host, Bill Brewster. This episode features Ryan

Dobrats of 3rd Ave. Funds. He stops by to talk about 3rd Ave's real estate strategy. It's an interesting conversation. It probably should have occurred in the middle of the Reed episodes. Think Ryan has some good counterpoints to some of the REIT structure and I kind of wish that I had dropped it then, but alas, things are not perfect and here you are. I think this is a very interesting conversation. I enjoyed speaking with him and I hope that you will enjoy listening.

As always, none of this is financial advice. Everything contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions. Do your own due diligence and the information in this interview represents the opinions of Ryan Dobrats and is not intended to be a forecast of future events, a guarantee of future results or investment advice.

Views expressed are those of individual and may differ from those of other portfolio managers or of 3rd Ave. as a firm as a whole. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The 3rd Ave. funds are offered by prospectus only. The prospectuses and summary prospectuses are available on 3rd Ave's website or by calling 1-800-443-1021. Read the prospectus or summary prospectuses carefully before investing.

Read the docs folks, you know the drill. Read the docs. Anyway, hope you enjoy the episode. OK, bye.

So, ladies and gentlemen, thrilled to be joined by Ryan Dobratz of 3rd Ave. How's it going, Ryan? That's going Bill, great to be with you today. Nice to have you. I tell you, one of the things when I was reading your letters that I was super jealous of is your signature. I'd like to just be Bill and have that kind of like your penmanship is good and it's crisp and it's just Ryan. I was like, that's dope. I like that. Like. I appreciate that I I see that in your future.

It may be, I don't know. My my signature looks like chicken scratch. When did you just go with Ryan? When I stopped writing checks. There you go. Yeah. I used to go by Billy and then I

went to, I went to work at like a Bank of Montreal. It was B MO Harris. But anyway, they were like, you can't be Billy until you've done something. So then I became Bill and then I never went back. But I I kind of miss like Billy Brewster had a good ring to it. Oh, well, maybe maybe if I make it again, I'll go back to Billy. We'll see. So anyway, you want to describe what you do? Yes, sure.

You know, I've been at 3rd Ave. management now for for about 18 years now, a portfolio manager focus on the real estate value fund. The the real estate value fund was launched in 1998. Today I manage it with Jason Wolf, but kind of took an interesting route to to get here. I started off at the University of Missouri was there in the late 90s and early few. Yeah, I like Mizzou. Mizzou has called has had a a

resurgence of sorts. And when I was in Business School there my last semester, I was so lucky. I took this class, semester long course focused on Warren Buffett. And it was funded by a great guy, Harvey Eisen that wrote Bedrock Capital out outside of New York. But he paid for it out of his own pocket for, for US students at Missouri to take it. And it really just opened my eyes to to so much.

I mean, amazing to read the Warren Buffett way and the Warren Buffett shareholder letters as textbooks. And as part of that class bill, there was a speaker that came to us to present at the end of the semester. His name was Scott Moore and he was at that point running the value funded American Century, which is based out of Kansas City. And I really enjoyed his

presentation. I, I went up and, and spoke to him afterwards and I said, if I wanted to get into your seat down the road, what would you kind of recommend? And he said, it's probably pretty challenging. There's not a lot going on in investment management business in this area. But if you, if you really want to get into the business, I would tell you to choose one. Go learn an industry and had learned it very, very well because you'll become an expert for that and a resource to

others. And it will also be easier for you to pick up other industries as you go down the road. And he said to go get your CFA. And both of those pieces of advice were, were terrific in retrospect. And so after that I, I started to look into the CFA. I, I graduated from a zoo. I joined up with Ernst and Young. I was originally part of their cash management practice, which was a, a great business.

They were kind of the go to advisor for financial institutions, insurance, banks, etcetera to to maximize their interest income. That was kind of the projects they were signed up for. However, when I joined them, it was right after 911 and in Greenspan had had cut rates and so there wasn't a lot to do. And I got reassigned to a Sarbanes-Oxley project and I got sent to Milwaukee in the middle of winter. And I was working on an insurance company and going through their controls.

And while it was sort of interesting, it wasn't really what I what I signed up to do. And at about that same time, I reconnected with someone that I knew from Kansas City who worked at Morningstar. His name is Mike Trigg. Mike. Yeah.

Mike. Yeah. Do incredible things that WCM with some other Morning Star people that followed him out there. But I I connected with Mike and he told me that Morningstar was what was in the process of hiring and he kind of knew I was interested in value investing. And so I sit in my info had an opportunity to to interview a few different times when was taking the train from Milwaukee to to Chicago in in between my my role and Ernst Young to talk to them.

But ultimately took that, that job and so I moved to Chicago and I got a side to their, their real estate group. And I didn't have real estate experience at the time per SE, but I grew up around real estate. My, my grandpa worked in construction, my dad did a lot of real estate tax and and and finance. So it, I, I picked it up pretty quickly and I ultimately was covering kind of 3035 different companies.

And after about a year in, I realized they're really only four or five of these companies that are, are, are really interesting. I mean, that own, you know, really high quality assets that have thoughtful management teams that are, you know, redeploying capital, creating value. And one of the other things that those companies had in common is was Third Ave. was one of, if not the largest shareholder of, of each of those businesses. So that's how, how 3rd Ave. kind

of got on my radar. And so this was called, call it 2000 and, and five. And so I, I got onto 3rd Ave's website and came across their shareholder letters. It's something that, that the firm has historically, you know, put a lot of time and effort into. And I, I read those shareholder letters and I learned more about real estate and value investing in, in, in parsing through those letters than than really anything else.

And at, at one point I, I got on there and realized that Marty Whitman had written a number of value investing books. And so I went out and got those books. I, I really identified with his kind of safe and cheap or modern value approach to, to investing. And ultimately I, I got onto the website one day to, to download the, the updated letters and there was a, a job posting for a, for a real estate analyst

opportunity. And so I basically fell out of my chair when I, when I saw that I didn't have a resume put together at at that point, had no plans of leave, you know, leaving morning. Sorry. It was a it was a great role, great, great group, but that was a, a fat pitch opportunity in my mind. So I went home, put together a resume, sent it in, connected with Jason Wolf, had a great conversation with him. And then he ultimately had me up to New York, met the rest of the

group there. And probably within a month I

was moving from Chicago to New York to, to work for 3rd Ave. And that was 2006. And so it's a. Shame that you downgraded cities, but I forgive you. Well, you know, interestingly, I, you know, I, if, if you were to look at the backdrop behind me, you may pick up on the fact that it's, it's not New York, it's it's actually Austin, TX. And we could definitely get into that.

But about seven years ago I moved down here to open an office for us. It's been very strategic for us on the residential real estate from well, I mean, we're basically within two hours of four out of the top 6 building markets in the country. Yeah. And it just gives us some boots on the ground at a different perspective. Paid off particularly well. I think coming out of the the pandemic, it's very helpful to get out and go visit some of the sites.

I mean, I can go see what's going on at some of the Dr. Horton and Lennar communities. I can see what kind of HVAC's they're installing. I could talk to the sales people. It's, it's been really beneficial. It's also actually been helpful to avoid certain things. There's I I think been a narrative that Sunbelt office is, is OK. People are back in, in, in the office and certainly utilization rates are up, but they're nowhere near where they were pre

pandemic. And I mean, if you can see some of these office buildings behind me, they're either half leased or fully leased but not being utilized. There's just a ton of access space. So I think it's been helpful many unexpected ways. But yeah, I've been down here for for seven years, but been at 3rd Ave. for for 18 now. Yeah. So with Office, right, I mean, I am pretty certain that I'm going

to characterize Marty correctly. So, but if I don't, please correct me because you know better than I do. But a lot of what I perceived him to do was look at asset values and think about, OK, well what's the future earnings power that this asset base might be able to create. And you look at the amount of capital that's in office and I think it's kind of easy to say, OK, well maybe this look at the assets, what should they earn. But to your point, like the

current outlook is not good. How do you think about what is too hard to forecast in office versus when it might get sort of exciting? Because I, I do think like office fundamentally has some purpose and the probability of just from like a capital cycle theory, there's not a whole lot of capital flowing into it. But the economics also seem too hard. I don't quite know the right way to frame this, but there's a lot of sunk capital in office and a lot of it is underutilized, right.

And on, on one hand, I look at the asset base and think, well, for good properties there should be a future here. And I sort of like the idea of the capital cycle working in your favor because a lot of incremental capital is not going into office, it doesn't seem. On the other, the current

economics are so uncertain. So I'm kind of curious how you think about putting things in a too hard pile versus when you see an asset base that you say, OK, I, I can kind of see how the earnings power can grow from here just like philosophically. You know what, absolutely. I mean we operate with a contrary mindset and and so we're naturally interested in situations such as what offices is going through today.

And I, I think we certainly believe in the, the narrative that is out there that suggests that the high quality, well located modern buildings will ultimately take market share as tenants move to those more desirable properties, sort of leaving the B&C property types underutilized and, and, and probably more fit to, to be, you know, repurposed or put to a higher and, and, and, and better use.

And so as a result, you could theoretically do well by focusing it on those Class A locations and we'll continue to to monitor those opportunities. But you know, one of the the issues with office is that it's incredibly capital intensive, right, because you're paying very significant CapEx dollars for tenant improvements for for leasing commissions. And as a result of that you're sort of after CapEx return can

often be be diminished. The one other thing that we're probably more cautious on relative to others that have sort of bought back into the office space, it is, is that we think that property taxes for these Class A locations, particularly in the gateway cities is going to go up pretty tremendously. And while you ultimately do pass that through to the tenants, I think that that will sort of put

a governor on how high rents can go. But historically, financial service firms, they may pay 6 to 7% of their their revenues and rents and we don't see that going to 10:50 percent. So if, if taxes are, are, are going up as these cities, you know, need to fill their budget deficits, that could impact the economics of, of owning office. And So what we've done is we've taken a little bit of a different approach and we've really focused in on the real

estate services companies. These are the CBRES, these are the, the Jones flank, Lasalle's, the Savils of the world who historically have really made most of their money from transacting to real estate, right? They get paid to lease, they get paid to oversee financings, they get paid for capital markets transactions.

But over the past kind of 10 to 12 years, they've also built up pretty substantial recurrent cash flow streams doing property facilities management, investment management, etcetera. So they're more diversified today, but their earnings are are depressed because of the volatility that we've seen that in the real estate capital markets because the lack of leasing transactions with all the uncertainty out there.

But as the demand starts to to come back to market, we think that those companies are are poised to be ones that that really put up the earnings growth, the cash flow growth and ultimately increase the the underlying value as as things unfold. That makes sense to me. One of the sort of questions that I that I come to is that there's the value sort of investor studies that say like the lowest decile companies are the ones that do the best as a

valuation wise, right? Lowest decile does the best because of I guess the improvements make the stocks go higher. When you think about like CBRE is a high return on capital, higher multiple business versus

office theoretically is at well, not theoretically it is a lower return on capital business and trades at a lower multiple. So how do you think about sort of like trading up in quality and paying more to do so? I mean, I, I, I fundamentally

think it makes sense. I'm just kind of curious to hear how you think about it if. If you look back at you know, the 26 years of our our strategy, I think you will have seen us migrate from some of the more statistically cheap real estate companies over to some of the the real estate companies that are compounding the underlying that asset value of the business underlying intrinsic value, however you want to refer to it. And we can go into this little

bit more. But I I think Marty actually made that same transition over the the course of his career where, you know, a third Ave. we've always focused on well financed, well managed companies that treat at discounts to conservative estimates of that asset value. What people I don't think appreciate is that in the last kind of 10 to 12 years of Marty's career, he really emphasized the 4th pillar and that is companies that are also compounding NAV by 1010% or more per year when including

dividends. And, and so that way if the, you know, discount remains, you're still making 10% a year as the underlying value compounds. And we've made that, that, that sort of same migration because when you look at some of these real estate companies, particularly if they're in commodity property types and you factor in that the CapEx and the T is that we talked about earlier, the returns aren't as

compelling as, as they may seem. The the one other thing here and, and, and this applies to a lot of the office companies, the office REITs is that they're also, you know, already fairly leveraged with debt that's at, at pretty low cost. However, it's rolling over the next four to five years. And and so to the extent that they can't drive the top line higher, you're going to see that interest expense reset and really chew up some of those, those cash flows.

So that's another thing that makes us a little bit more cautious on, on some of these office companies. And we'd much rather be in a, a company like CBRE that you know, is trading at in maybe 14 to to 15 times earnings based upon a rebound of their transaction activity.

And a, a lot of that cash flow, 6065% of that cash flow is now recurring in nature because they are on the long term contracts and property management, facilities management, not much CapEx, their capital light like you said, in fact the cash flow stream may be more desirable than an 8 to 10 year office

lease. So those are things that we waive it at the end of the day, what we're doing and when we underwrite these companies, we're looking at sort of low, mid and high case net asset value estimates for for every one of the businesses. Generally we're trying to buy in plus to our low case and and trim it back and exit closer to

our our high case. But in addition to looking at the Nabs, we try to come up with sort of a, an IRR and looking at what that NAB will do over the expected holding period. You know that may be four or five years and then make a risk adjustment to that to come up with our expected risk adjusted return for, for a business. And then within the fun try to concentrate our capital prudently concentrated around some of those highest risk adjusted return opportunities.

And in our view, CBRE is certainly one of them. Now when you say NAV is that, I mean do you use that in that way that some people might call private market value or something like that? Yeah, that's certainly one of the components. So when we talk about the range of Nabs, the kind of low, the mid and the high case or high case NAV will typically be the private market transactions, what a controlled buyer is willing to to pay for the

business. On the flip side, if we're talking about a commercial real estate company, our low case may be replacement cost that's generally a, a decent proxy, a good safety net. And then our our mid case, it is usually sort of a mid cycle cap rate or, or or cash flow multiple. And so we used sort of different benchmarks for different types of businesses.

But for commercial real estate business, that's kind of how we think about the low, the mid and the high replacement cost, mid cycle cap rate and then what a control buyer would pay for the

business. I think where some of those asset light businesses, you know, when, when you think about the statement of conservative appraisal of value, the asset light gives you potentially a more bankable to the extent anything in the world is bankable, but earning stream to actually base the valuation off of, right.

Whereas some of the more capital intensive to your point, if if you have to come out of pocket for tenant improvements, what you may think cash flow is, you may wake up and be like, oh, I was way off of what my estimated cash flows were in more in some of the more asset heavy businesses I feel like. Yeah, that's, that's fair. And then you know the other component to some of these asset light businesses such as CBRE is if they are really well capitalized.

And they're very well managed. They tend to take market share when industry conditions are are are challenged. And one of the other things that gets us excited about where CBRE and JLL sit is that one of the largest players out there, I won't name the name, but the third largest player in kind of the real estate services brokerage space is not that well

capitalized. And with the reduction in transaction activities, their businesses under a little bit of pressure and we've seen them, you know, lose some key producers and lose some key mandates. And those people are migrating over to the the best in class companies of CBRE and Jol, you know, are, are taking more share. And, and so not only are they likely to get back to, you know, peak earnings when transaction activity does rebound, but that they should actually likely

surpass that. And, and that's one of the things that we've really seen out. If you go back to sort of the GFC, we got involved with the title insurance space and there historically were three big players in that going into the GFC. It was Fidelity National, First American and then Land America. LFG was the the, the ticker and they didn't make it through the GFC. And the bulk of that market share migrated to the F&F and Faf.

And then some other players like like Stewart, Old Old Republic picked up share. But those that are well capitalized and well managed will will probably survive those challenging moments and ultimately emerge more valuable and more profitable. Yeah, that makes sense. And then I guess the other side of it is when things are good, sometimes some producers leave, but they're not exactly. I don't, I don't know that that takes the the enterprise value down too much, right? That's true.

And, and, and for some of these businesses that are much more dependent on, on the transaction activity, that would certainly be the case. But as I mentioned with CBRE and it's the same as the case for JLL and Savils, they've really diversified their businesses coming out of the financial crisis. They wanted some more recurring revenue streams. And so they have focused on these property management, these facility management mandates,

investment management, etcetera. And also, I, I mean, when you're, when you're working with these Fortune 100 or Fortune 500 companies, brokers may leave, but ultimately that they, they're giving the mandate to the franchise, They're giving the mandate to CBRE because they have relationships with them in a certain market, but also in throughout their global footprints. And that's really changed it. What's really interesting to see how significant the market share

is growing. CBRE accounts for almost 25% of global real estate transactions. How, how promotional. Yeah, yeah. And it's actually slightly greater internationally than here in the US Have talked to some smart people in the past and they actually compare what's going on in the real estate brokerage and services businesses to what happened with insurance brokerage resolve significant consolidation. And I, I believe in that case they, they ultimately consolidated up to about 7075%.

And and so there does seem like there's still room for growth, particularly if the third largest player ultimately gives up a lot of market share here. But yeah, very interesting devolution and in that part of the real estate sort of value chain and they've always been a sort of tollbooth on real estate transaction activities when these businesses have been around for more than 100 years in most cases. And a lot of other real estate investors don't own them.

And and that's because they're C corps, they're not Reit's, they're not held in a lot of the the real estate benchmarks or or indices. And so I think we're one of the few kind of real estate dedicated investors out there that have a significant amount of capital invested in them. It's probably about 15 to 60% of our portfolio today, but we think that they are superior businesses that own over, you know the long term which is our focus kind of five to 10 years.

It does seem like at least from the letters that I've seen,

there is not much of A focus on Reit's or or I shouldn't say not a focus because but you choose or have chosen recently not to own many Reit's. Is there a reason that you prefer the C Corp like operating company type as opposed to the Reit's? Yeah. So if you go back in time, 3rd Ave. has always favored the C Corp model over the the the REIT model because 1, 3rd Ave. focuses on long term capital appreciation as opposed to

current income. While we like current income, we would much rather have the companies retain that capital, reinvest in their business, compound the underlying NAB over over time. It's just more a more tax effective way to compound capital in our view.

But in addition to that, it's a much more reliable and, and safer business model and in, in our view, right, because the real estate operating companies that are retaining capital, they're self financing their expansion where a REIT is required by law to distribute about 90 to 100% of their net income, depending on the, the jurisdiction.

So to the extent that they want to go make a, a large scale acquisition or they want to, you know, fund, you know, a, a pretty decent size refurbishment project, they typically have to go out to the capital markets. And while the capital markets might be cooperative most of the time, they're certainly not cooperative all the time. And there are moments when the, the, the real estate capital markets are locked up and those reefs can't raise capital, but it puts them in a tough spot.

And if you were to go back and actually look, you know, reefs have been around since the Eisenhower era. He was the one that sort of passed legislation. But they, they started to, to grow a lot in the 70s and the 70s was a more challenging period for real estate in the first part of the decade because it was more stagflationary, right? And when you saw rates reset higher and a lot of those Reit's that were out there couldn't raise new capital, they filed for bankruptcy.

And, and that was something that Marty always kind of reminded us of. And as a result of that, he would never really, he loved real estate, but he wouldn't own Reit's just because of his experience with REIT in the, in the in the 70s. So when we launched our real estate fund in 98, we also emphasize the real estate operating companies over reeds and that's remain the case. Historically, we've had probably 2/3 in Riox, 1 thirds at 1/3 of the capital in, in reeds. Today it's even more

significant. We have about 80% in, in, in real estate operating companies versus 20% of reeds. And that's just because of some of those core principles that I, I outlined. But in addition to that, when you look at the, the next kind of four to five years for certain pockets of REITs and it's going to be challenging because going back to office, it's hard to see a lot of top

line growth. At the same time, these interest rates that they had locked in previously are resetting at, at higher rates and it's just chewing up cash flow. It's going to be tough to create value. It wouldn't surprise us to see a lot of consolidation actually in the in the REIT space because that's going to be one of the few ways that that some of these REITs can can create value and increase cash flow per share is just to to merge, strip out the GNA and move forward as a larger enterprise.

I like it. I guess it that's likely why you see, like a lot of public REITs, the argument is that their balance sheet, at least when it comes to residential multifamily, the argument is that their balance sheets are a little too lazy. But that's probably a reflection of the fact that if you have to always issue equity, you may want a lazy balance sheet. Yeah, that, that, that's fair.

I mean, if you look at the company's balance sheets today, the Reed's balance sheets today relative to where they were going into the the GFC, they're much better. I think the average loan to value ratio or net debt to asset ratio is in the low 30s where it was at the the mid 40s sort of pre GFC. The debt to EBITDA ratios have been reduced from you know, nearly seven times back then. So it's sort of kind of five, 5 1/2 Times Now. So the, the, the balance sheets are in much better shape.

It's, it's just the set up for cash flows and dividends to continue to increases is difficult for certain property types. And it goes back to the top line

kind of maybe being a little bit more stagnant and also your interest expense just resetting and increasing and that sort of challenging that the ultimate free cash flow in the business. Yeah. Do I recall correctly that you own Prologis or is that not correct? No, we do. In fact it is one of our larger RE holdings. And I mean you probably know pro lodges pretty well. It's the largest owner of industrial and and modern logistics assets.

You know globally they have a just incredible portfolio, I think 1.4 billion square feet on a on a pro rata basis globally about 80% of it is in the US In addition to that, they have a very sizable asset management business and they have a an emerging sort of data data center opportunity which we can

we can talk more about. But PLD is in our view set up much differently than than some of the other Reese in the sense that we see significant top line growth and they also have their debt locked in at low cost for long term. And so we expect them to continue to to drive the bottom line so to so to speak. And in fact, if you look at PLD today, their in place rents are about 40% below market rents.

And that's because unlike multifamily, which typically rolls their leases every 1 1/2 years, industrial real estate companies are are typically rolling their leases, you know, every four to five years. And given the significant increase and demand that we've seen for industrial space sort of post pandemic, PLD has yet to capture all the embedded reversion in their in their portfolio.

And so as they capture that, they're increasing their overall cash flows by about 8:00 to 9:00 percent a year. And then their debt is also locked in for about 3% on an average term of about nine years. And so their interest expenses is, is pretty steady. So that top line growth is turning into cash flow growth. And the other thing that's really interesting with PLD is they have this opportunity to continue to add solar to their

rooftops. They're the the second largest owner now of on sites rooftop solar, which has become a decent sized business for them. But they're also evaluating data center opportunities throughout their portfolio and they're dropping little heads here and there about it.

When their most recent conference call, they basically outlined that they have up to four gigawatts of development opportunities in the portfolio, and that is a a pipeline that is nearly the size of both Digital Realty and Equinix combined.

It's quite sizable. Now, 2 1/2 gigawatts of that is actually sort of locked up. The power of the other 1 1/2, they're going through the planning and application process, which is difficult, but PLD is also assembling a pretty talented team of data center professionals. And to the extent that they can unlock value in there, that would be a, a, a big game changer. So we are involved with PLD. We, we, we see opportunity in that mark to market opportunity on the leases.

We think there's value in their low cost debt, but they're also some ancillary opportunities that the data center one being the most interesting in our view on what could drive value kind of over the next four to five years. How do you think about the risk of capital chasing sort of both those end markets and what that could do to economics?

Yeah, no, absolutely. I mean on the industrial real estate side outside of self storage it it's probably the easiest property type to build and you know lead times are are usually only a year and a half to 2 1/2 years out. And so you can see new supply come online and it changed the economics in the market and that's what we have been experiencing, You know, more recently in the industrial real estate space, overall supply increase to about six, 6 1/2

percent of the national market. And, and, and so that that is ultimately translated into higher vacancy rates for industrial real estate relative to what we've seen kind of over the past 10 years with the, you know, big demand driver of e-commerce having a big impact on the market. But when you look at the supply pipelines, they're moderating very significantly going into 2025. And there are other demand drivers on the industrial real

estate side. I mean, not only does e-commerce continue to increase, but near shoring is driving demand. And I know that is a blanket statement and a lot of that demand hasn't materialized. But in terms of autos and and pharmaceuticals and it is having an impact in semiconductor as well in certain markets like Phoenix. And also with probably of all the uncertainty that we're going to going to face with the the new administration and what the

impact of tariffs are. We believe that the corporates will continue to run their supply chains with a focus on resiliency as opposed to strictly efficiency, which should lead to to higher levels of, of inventory. So those are all positive drivers for demand that should continue to allow, I think industrial real estate owners to

be in a, a favorable backdrop. And while people are have been up in arms about the, the supply levels, yeah, vacancy rates are are still kind of only 6 1/2% nationally. And historically that's a strong market and it remains a pretty strong market. They're just areas that are a little bit more more challenged. So that's something that we have to watch on the industrial side as well as the the self storage side. And you were asking about it as in regards to to data centers as well, right?

Yeah, yeah. And I was just thinking like if you own, by the time that you see the vacancy numbers tick up, seems like the stocks will sell off a little bit. But I guess if you own it for the long term and you think that that you're owning it at a conservative appraisal of NAV, that's just kind of part of owning real estate. Yeah, that's very well said that. And you're right, listed real estate tends to lead direct real

estate. And in terms of valuations resetting both on the downside is as well on the on the upside usually listed real estate as a head of appraisals by call it 9 to 12 months. And and so to the extent that fundamentals are slowing, if there is excess supply or more limited demand, yeah, you'll see the list of real estate stocks correct pretty quickly, but they often times overcorrect sort of

both ways. And PLDS stock price went through a difficult period earlier this year on, on some of those concerns, we actually took advantage of it and added to our position. I mean we are buying into PLD earlier this year at at sort of a look through cap rate of about a 7 1/2% if you were to mark their, their leases to market and also an applied price per square foot value of about $150.00 a square foot, which is below replacement costs in our

view. If you look at some of the the high barrier to entry markets which they're focused on, the cost to build new product is probably 180 to $200 a foot. So when you can buy really well located real estate at at high

yields and discounts for replacement cost, things tend to work out over time, provided there aren't secular changes such as what you know we're seeing in office and what we've seen in in retail. But we, we, we think much like single family residential industrial is secularly favored looking out over the next 5 to 10 years. Just from a business standpoint, how do you compete with a

private firm? I mean, I saw, I saw what B Reed had something like a 3% drawdown in 2022 and the publicly traded ones had like 35. And I always found that to be kind of interesting. I don't think that those numbers are exactly correct, but directionally they convey the, you know, do those people that you talk to understand the private equity is like volatility smoothing for lack of a better term. I said it's not you.

Yeah, there's been a lot written about this a lot, a lot of focus on the space that the private read format. In our view, there are advantages to focusing in on unlisted real estate where we we spend our time and they're also disadvantages to focusing on unlisted real estate. I mean we think some of the primary advantages to to being a real estate securities listed real estate is that you can buy into some of the highest quality real estate assets and

portfolios across the world. You can also align yourself with some of the most talented management teams globally that are often well incentivized to create value for the entity. In addition to that, publicly traded real estate companies have competitive advantages in the sense that they have multiple channels of capital to access. They can issue new equity, they can issue JV equity.

Publicly traded companies can typically tap the unsecured bond markets which private reap's usually can't. They can access mortgage debt. There are certainly a lot of advantages to to be public that the primary drawback is that you have to deal with some of this volatility in the stock prices that that you alluded to. But in our view that's actually an advantage in the sense that you get these market dislocations and you can buy into these irreplaceable

portfolios at huge discounts. Relative to what any private buyer could ever buy that portfolio or that could that company at and if you truly are long term and the company is well capitalized, that security price is likely to rebound over time. So if you're in it for five years plus you're likely to do do pretty well. So that that's why we like the listed space. And if you look at listed real estate relative to direct real estate, most studies will suggest that listed real estate

has historically outperformed. Another drawback though, to listed real estate, and then it's something that you're, you know, better off on the director private side is that you don't have to deal with the ups and downs, but you also have control, right? You can make the decision on whether you want to finance the asset, whether you will lease the asset, whether you want to sell the asset.

Depending on who you are right, If you have the LP you don't exactly make those decisions through the GPS. No, you're right. If you're an investor in a private REIT, that's not the case. But if you're an owner of direct real estate, you have that that element of control. And actually going back, Marty and Sam Zell were were good buddies because they work on some things together. They used to have this debate at

some of our conferences. Sam Zell was of the view that publicly traded real estate should trade at a a premium to the real estate value because of the liquidity right there there. There's a value in being, being liquid. And if you look at a lot of markets historically, they probably have traded at NAV if not a slight premium.

And Marty was always of the view that no, in fact, it, it should trade at a slight discount, if not more of a more than a slight discount to NAV because you don't have control and also you don't get some of the tax benefits that the direct real estate owners get, right. I mean, if you're directly in real estate, you're probably taking advantage of accelerated depreciation as other items to boost your after tax cash flows.

And often times when those are owned and reads for C corps, you might not get some of those benefits. You certainly aren't going to get those benefits as an outside investor in in in the stock. So maybe the market sort of agreed to meet the two guys in the middle and then trade around NAV. But yeah, they used to have that

debate on terms of whether listed should trade at a premium or a discount. Yeah. I guess the thing that's been popular over the last I guess since 2020 is the idea of almost like an illiquidity premium as opposed to liquidity premium. And I guess so I've kind of settled on this is it makes sense if you think about people protecting their career just from like an incentive standpoint. It's nice if you are allocated to private and have to answer some questions.

It's nice to be able to have a mark that you can say, well, somebody else did this, like it's not my mark, it's their mark and my volatility isn't bad and.

We're all doing it behaviorally. It makes a lot of sense to me. It makes a lot of sense too, from like a hurting perspective, which I guess it's just another way to say behaviorally, but theoretically it doesn't make any sense to me. But it's the way the world works. You know, clip that ask misses, and certainly, you know, written about this to a great extent. And there's also a similar mindset when it comes to investing in active versus

passive in the listed space. Morningstar wrote a study that was published I believe earlier this year. And they looked at all of the, the different sectors and how those actively managed funds within the sector performed relative to the the broader indices. And real estate was the only sector and actually category which had the active managers outperform the the passive funds

over 35 and in in 10 years. And so there's statistical evidence to support that you wouldn't want to be active in the, in the real estate space, but that's hasn't shown through in the fund flows. The fund flows continue to go to

go to passive. And I, I think actually late last year, earlier this year was the first time that in the real estate space there was actually more capital and passive relative to active, which isn't, you know, not dissimilar to what we're seeing just in the, in the broader equity space. But when we, when we stack up our portfolio relative to a, a passive funnel, I'll just mention the V&Q that the Vanguard real estate index, because they're the largest one.

We think it is a superior alternative and proposition, especially if you believe that real rates are going to going to stay positive. And some of those were traditional REITs are going to be pressured as interest costs reset. But I mean when when you look at our portfolio relative the the VNX, our portfolio on average has a, a loan to value ratio or a net debt to asset ratio of about 15%. The B&Q is about twice that at

about 3233%. The B&Q trades at more than two times book, we're at about 1.2 times book. However, you know a lot of those books are, are depreciated costs or to the except they're a service business, they're not reflective of the underlying value. You know, our portfolio trades at a 15% discount to our estimates, probably more like a a low mid 20 discount to our

high case estimates of of NAB. Whereas if you were to look at some of the sell side firms out there, they would tell you that they're real, they're re universes trade at kind of parity to NAB today. So we think the 3rd Ave. real estate value fund is a better proposition.

And historically we've been able to outperform our index over the long term, which is our our main focus. But a lot of investors just want to go passive. They're more focused on fees rather than net returns. And we've seen that shift impact the the real estate markets pretty significantly over the past four to five years. How institutionalized? Is Third Ave. like if I were to buy your fund, how much am I betting on Ryan versus sort of the firm. Well, we have a very.

Robust process that that the real estate team has has put in place in in in practice over the years. I mentioned that I, you know, been at, at at 3rd Ave. since 2000 and, and six and coming out of the first three to four years really coming out of the GFC, we did pretty well during that that time period. But we we realized that we could

have done even better. And I worked closely with my long time business partner and the Co manager on the front, Jason Wolff to, to put this more robust and more repeatable process around what was already a very unique real estate estate strategy. And as we have implemented that and fine tune that, we, we think that we've made this, this strategy even more compelling and, and, and made the return profile, especially relative to some of our peers and some of

the index funds more compelling. And, and, and that shows up in the numbers. If you were to look at our funds, depending on the share class, we're going to be a four or five star fund. Over the last 10 years, I believe that Lipper has recognized either the mutual fund or the use its fund as, as one of the best global real estate funds in, in various categories.

And these are things that we weren't recognized for earlier on. So we think by, you know, taking this unique strategy and putting the robust and repeatable process around it, we've made it a more durable strategy and one that can add even more value over the long term. But no, we have, we have 4 dedicated real estate professionals at the strategy and we also have, you know, 10 investment professionals at, at 3rd Ave.

We're very collaborative. We meet as an investment team every Tuesday and, and Thursday morning. That's something that we've done at 3rd Ave. for, you know, 2 plus decades as a tradition that, that Marty kind of started and we, we've carried that on. But in addition to that, we meet separately as a real estate group. So Jason and I are, are certainly key components of that

the strategy. But we think that we built something that is is sustainable and and durable going forward because of the the the process that we put in place. That makes sense. I ask because the. Extent that you traded a discount, maybe that would be a reason, right, If there's like key man risk or something, but apparently not, not to not. To talk down about.

Yourself, by the way, I mean, well, a, a, a. A key point there in terms of the the discount in NAV that's sort of the the look through discount on where our holdings trade relative to what we think it's worth, not necessarily where the fund trades. If this were a closed end fund, you could often see that that discount, right. But as an open end fund, it it trades in line with the the daily in AV of the underlying holding.

But just in terms of the price to value proposition, what we all we think that there's there's that disconnect there. Yeah, yeah, I, I. Followed what you were saying, but it's good to clarify that. Well, yeah, certainly I I. Mentioned, we not only manage a a mutual fund, but we also have a a usage fund, which is a mirror image of our mutual fund. It's just available for offshore investors and you know, a lot of

time when we're talking to investors and and other geographies that that comes up and and they associate the discount to NAB with the the the discount to the underlying holdings such as what you would see on a closed end fund. So yeah, always good to clarify. Yeah, indeed. Do you want to talk a little bit about residential real estate? What are the big advantages that we've?

Had at 3rd Ave. particularly on the real estate side is that we have this flexible mandate that allows us to not only invest in some of the real estate services companies in the commercial real estate companies that we talked about, but also the vast amount of opportunities on the on the residential side.

And we've always had a little bit of exposure on the residential side, but we really started to increase that coming out of the more challenging period, putting it gently, that the residential markets went through in 2007, eight and nine. And for the better part of the last call it 7-8 years, we probably had in between 30 to to 40% of our capital invested in

the residential space. And really throughout the value chain, timber home builders, home improvement, title insurance, really a, a diversified set of the companies. I mean, they're targeted investments. They're all really well capitalized, really well managed, but largely positioned to capitalize on the continued recovery in the residential

markets. And when you look at global real estate, there are very few places that have the supply demand dynamics that the US residential markets have in terms of us being basically at record low levels of supply was often quoted or cited as a as a, a number of months of supply, but that's based upon transaction activities. So when transaction activity is very low, the supply looks higher. When transaction activity is high that the supply might seem low, but it where it's really

not. We look at just overall inventory levels. And if you look at national vacancy rates, we're, we're basically at a a 4550 year low, So very low levels of supply. At the same time, you have record high levels of of demand. And that's a result of basically millennials moving into their prime home buying years that 35 to kind of 49 year old age bracket. The average homebuyer today is 38 years now.

So as you continue to see growth and in that age bracket as the millennials move through there, you're, you're, you're going to see more demand and that and that's really driving activity in the single family space where we have a, a lot of our residential investments focused. And actually, if you look at at what's going on more recently, a lot of homeowners are are essentially locked into their existing homes because of of

mortgage rates, right? Yeah, well, choosing to stay would be. How I would say it, but yes, yeah, yeah, no, that's that that is. A better way to put it, but approximately you know, 75% of homeowners that that have a mortgage have a have a rate of 4 1/2 percent or or below and prevailing mortgage rates are in the 6 1/2 to 7% range. So if one wants to move the monthly cost, it, it is likely to change pretty significantly if they want to maintain the same level of accommodation.

So what we're seeing is existing homeowners staying in place, but at the same time, the millennials continue to to enter the market and, and, and what single family homes. And so the new home market is, is experiencing much different fundamentals than the existing home market. And what's going on in the, the new home market is that the, the large builders are are taking significant share.

They're using their balance sheets in their, in their scale and their efficiencies to give up some margin to, to buy down mortgages so that they can make it affordable for a, a, a new home buyer. So if someone were to go look at ADR Horton or Lennar home today, they may have an opportunity to buy a home with a 5% mortgage rate instead of 6 1/2%. And it costs the home builder probably 250 to to 400 basis points of margin and apply that down usually for the the life of

the loan. And as a result of that, you've seen the large builders take significant share, something that the smaller and regional builders really can't offer it. It's pretty amazing pre GFC that the large builders accounted for about 25% of new home sales and they're basically on on pace to be 50 to 55% at the end of the year.

So that the large public builders have taken, you know, significant share or so. And and because of those incentives, they've they've continue to deliver new homes. And Lennar, it is really you know with Dr. Horton the the leading player in the in the whole building space today. Those two alone account for about 25% national market share. I mean pretty amazing to think those two companies account for basically one out of every four new home sales.

Yeah, it is wild in in the country, but they have certainly taken advantage of their scale to lock up land, to lock in labor, to get efficiencies on materials and as a result they're able to deliver affordable homes. And and we're actually, we, we've really been focused in on the Lennar B shares relative to the A shares, which we think are a, A, a pretty interesting security. The B shares have historically traded at a discount to the A

shares. And historically that was the case because the, the liquidity wasn't there. But Lennar bought Cal Atlantic back in 2017. I think the deal closed in 18 and they issued new shares, including B shares as a part of that. And the trading activity really, really picked up. And the B shares, which once traded at a maybe a 1516% discount to the A shares, now trades that had maybe a six to

7% discount. But what, what's really interesting about Lennar is that it's, it's more than just a best in class home builder. They're scheduled or they're, they're expected to spin out a, a, a land development business soon. They've kind of guided that that would be in the range of 6 to $8 billion of, of book value. And they also have some other investments in a single family rental platform. They still have some multi family investments left, some prop tech investments.

If you add them all up, it's about $40 a share. I think the Lenore B shares trade about maybe 16165 today. So you strip that out, that's kind of implying 120 to $125.00 a share for the the whole building business and they do about $15 a share in, in, in earnings. So you're kind of backing into this best in class builder at around kind of eight times earnings.

But what what they've done over the last six to seven years is transition the home building business to one that that really looks more like NVRNVR has historically been the one builder that hasn't owned a lot of land. They've always used options it it limits the amount of capital that they have invested in the business. They also have significant scale in the markets where they focus.

NV Rs historically dominated the Mid-Atlantic and now through some of these acquisitions that Lennar's made, they have similar scale in in other markets. And NV Rs also been historically a net cash home builder. And and that's one thing that's really changed with the home builders over the last five to six years is most of them have paid down debt, Lennar's actually net cash. And so once they effectuate the spin, you're going to have a net cash filter.

They're going to be land light real market leader. We we think that they could trade more like NVRNVR is historically traded around 15 times earnings. And so if Lenore re rates as that's been happens in our view, there's significant value to be be recognized, right A 15

multiple on 15 times. SO15A share is few 25 + 40 dollars a share for some of those other things you're at 265. And the last thing I would say on the Leonard B shares and this isn't something that we we underwrite to, but it's certainly free option value for

for B shareholders. And historically what we've witnessed is when B shares convert into A shares and they have super majority voting rights which these Leonard B shares do they, they tend to get a about a, a 30% premium, meaning that they'll exchange at at at into 1.3 A shares. We've seen it at for a city, we've seen it at Magna more recently with tech resources, Constellation brands, etcetera.

So with Lennar B shares trading here at 160 take a reasonable value kind of in the in the mid 2 hundreds and then potentially ending up with 1.3 air shares down the road. It's a pretty interesting security. It's been one of our our top holdings for a a number of years and it remains that the case today. But that's one of the the larger positions that we have in the residential space right now. That is interesting, the home

builders. Are something I completely missed, which was real fun, but I I I knew for sure no I well that I know, but I I knew I well knew I suspected highly that people weren't going to be moving. I didn't know the rest of the I failed to see how the big home builders would be buying down mortgage rates. But I think if if rates aren't going down, continues to be a tailwind, right? Yeah, if you go.

Way back, it was actually an incentive that was used in the late 70s and early 80s when mortgage rates were an issue on some of these builders. Back then US Home, what was was the dominant player. US Home was actually acquired by

Lennar in the in the late 90s. But some of these tools have been used before, but with the regional banks sort of being under pressure in terms of lending, especially the land acquisition and, and development, that's created an opportunity for private equity capital to, to step in and basically the big builders to team up with them. And then so the industry dynamics have have changed.

But I know that you've talked about multi family with some of your, your previous guests at great length. And one of the things that that we've been focused on, we like multi family. I mean, it's a terrific asset class, right? And you typically rents track wages and you can get positive leverage. They have a, you know, borrowing advantage through the GS ES and you know, it's been under a little bit of pressure more recently with supply, but still a great place to be in in real

estate. The the, the only item we would add is that if you look at demographics for the rest of the decade, that that sort of 20 to 34 year old cohort, it's actually going to start to decline next year and, and do so for the rest of the decade. And I know that that's not the only people that they utilize multi family, but you know, the millennial cohort as they went through that, that age bracket 20 to 34, it provided tremendous demand tailwinds on the

multifamily side. And that's what we experienced from kind of 2011 basically through the pandemic. But now that larger cohort is in our view favoring you know the single family format moving to the suburbs and and that will continue to be tailwinds for the single family residential markets where senior living. Well, senior living there, there's. Certainly a lot of tailwinds there in terms of growth just in that that cohort.

But you know, one of the items that that is increasingly evident is that people are just staying in their homes longer than they used to. And there are a lot more, I guess, reliable home care options and because of mortgage rates also some people just don't want to leave their homes. So that's another part of the equation in terms of the depressed levels of existing homes.

It's that a lot of people are just staying a place longer, not to mention what's going on in the in the brokerage market, right? I mean that that business has been turned upside down just in terms of how commissions were and uncertainty on where you can advertise buyers commissions where you can't do it. There's certainly probably some opportunities that come out of that. The US historically the models then basically 6% of total sales price get split up 5050 between the brokers.

And when you look at what 6% as a percentage of a lot of people's equity, if they have a a mortgage on on it, that's a disproportionate share of their investment. I mean most markets internationally are kind of in the one 1 1/2 percent range. So we would expect to see some more pressure, which should you know generally be be good because the 6% Commission is AI mean. It's ridiculous, is what it is. Yeah. Thank you for saying that. Yeah, that's insane, especially.

Given the skill set of most people that take it. But anyway that's again me saying it, not you. Another thing that that's changing. And something that we're watching and we're also very, very heavily involved with as it relates to the residential markets is what is going on with the GS ES, right? What what's going on with Fannie Mae and Freddie Mac. And I know that you've talked about it with guests and in the past and I have I'm sure most of her. I think just Bruce, I don't think we've.

Talked much Freddie and Fannie I, I was curious because you've had a a holding in it for a while and I wanted to ask you from a portfolio standpoint, how did you think about holding I I don't want to deem. It speculative. Because the price you paid would probably argue that it was not speculative, but the timing in which you would realize the ultimate outcome I think is like almost certainly speculative.

So how did you think about sizing that and running a portfolio with such an uncertain out timing outcome before I get into? That that portion of it. Let me just give a, a quick update on, on where they are because a lot of these facts and in our opinion get overlooked and, and are certainly not reported in, in major financial

publications. As you and I, I, I would imagine most of your viewers know Fannie and, and and Freddie are mission critical entities when it, when it comes to the residential mortgage markets. They were pushed into conservatorship and in late 2008. Ultimately, they were forced to take accounting losses based upon anticipated provisions or or anticipated losses that they

would take on the mortgage book. Because of that, they had to draw down on the the senior basically preferred credit facility that was provided by the Treasury. However, as conditions involved in the residential markets began to stabilize and then ultimately rebound, those losses were were reversed. However, the capital was never really returned to to Fannie and and and Freddie because of a a controversial change that took place in 2012.

What is now deemed the 3rd Amendment or that the net worth sweep. And basically there was a change made prior to those accounting changes being reversed where the Treasury, which had previously charged about 10% annually for that the credit facilities provided, would now receive all of the, the, the GS ES future, future profits. And lo and behold, right after that change was made, the accounting changes were reversed. And they've gone on to generate significant profits.

And there were multiple lawsuits related to that. They were tied up in, in various lawsuits and in, in courts for many years. But a lot of this actually started to to settle in kind of in the the 2019-2020 time frame. And one of the major changes that that took place was under the Trump administration when Mnuchin came in as as Treasury Secretary. And ultimately when they were able to appoint their head to the FHFA, Mark Calabria.

And they they reversed that that net or sweep and began to allow Fannie and Freddie to retain a certain amount of capital, ultimately retain all of their capital. And because of the reforms that Fannie and Freddie have taken since they were placed in the conservatorship and some of the other changes that have taken place with their business model over the past 1415 years, people in, in our view don't appreciate how much that business is involved and how profitable they

they've become. I mean, just to put it in perspective, they've reduced their mortgage portfolios by more than 90% since they were placed into conservatorship. And they've also increased their profitability to a point where Fannie and Freddie are now making about $36 billion annually on a pre tax basis. I mean, these are some of the most profitable companies out there, especially in the in the

real estate space. And even since they were just allowed to start retaining capital kind of in that 2019-2020 time frame, they've already retained about $150 billion of capital, which is more than they've ever had. So these these businesses have really been been transformed and there were, you know, serious efforts to get them out of conservatorship under the Trump administration. Those were probably the most well documented through Mark Calabria's book Shelter in the Storm.

If you haven't read that, it provides some good background on, on where things back went. But it it seems like the process was sort of set aside during the, the, the Biden administration. But coming back to your question, how do we think about, you know, sizing it and thinking about how this could evolve? Our view was we weren't involved with it prior to the point where the companies can retain

capital. Again, we were very actually close to investing in the entities prior to that network suite because we were tracking them. We, we, we could see the profitability coming, but then the network sweep happened. And so we also kind of put it aside. But when they were allowed to retain capital, we, we thought that it was tracking to the point where it would exit conservatorship.

And we still believe that to, to be the case of the the warrants that the Treasury received as a part of the financing package that the company put in place when they wanted a conservatorship, not only included that that senior preferred facility, but also warrants to purchase, you know, 80% of the common stock of the two entities. And, and those warrants actually expired in 2000 and, and 28.

And so we always thought that that was sort of a, a reasonable expectation on when they could ultimately exit. And we were buying the preferred securities at sort of 10 to $0.15 on the dollar. So in our view, even if it took six, 7-8 years to get out, we, we didn't really envision a scenario where the preferreds would be sort of wiped out, so to speak, given how profitable they were and how quickly the companies were, were, were, were, were building capital.

And our estimate would actually only be enhanced to the extent that there were once again plans to sort of raise additional capital and get them out of conservatorship via recap and and release, which under a new Trump administration is more likely to come about rather than less likely given that they were already working on it back in 20, but kind of got cut short. Give it some of the delays with the pandemic and obviously with him not getting an immediate second term, let's say if they

get. Released from conservatorship, are they still going to be government, like basically government sponsored or guaranteed or whatever? Or do you think they'll be like fully private and not sort of these quasi governmental entities in our view? They will probably remain as as as government sponsored entities with a charter to conduct business not totally dissimilar from from from the banking business.

And that these entities will pay some sort of fee for a a credit facility that will remain in place and provide capital to these entities to the extent that they would need it. So you know, maybe they wrong revolver fee or something. That, absolutely. Right. Just like banks will pay fees based upon their assets or their their deposits, the GS, ES are likely to to pay something similar kind of eight to 10 basis points relative to the amount of capital that's provided to them.

And interestingly, if you were to look at their financials and if you haven't recently, just take a look at one of their quarterly reports. I mean it's, it's amazing how profitable that they are. But I mentioned the $36 billion of, of pre tax operating profits that they generate that already included about $2 billion of charges related to what is

called a TCCA fee. And that's a fee that was put in place on these companies related to basically the jobs and continuation Act that was replaced in 2011. And it it wouldn't be inconceivable to see that TCCA fee basically be replaced with what is an FDIC like fee go going forward. And and so even if they do pay a fee for that backstop that would be put in place going forward. And it shouldn't really impact that the profitability of these

businesses. And to the extent that you or anyone else, you know, watching wants to do some, some more work, there'll be, there's a lot of documents and a lot of legal documents where you can find out, found out some, some great details about the businesses in the process.

But there was a report put out I believe in August of 2020 by the CBO and it covered the process and the timeline of recapitalizing and releasing Fannie and Freddie from conservatorship and putting them back into the public markets. And they, they had sort of two different timelines in there. The first timeline has already passed. That was basically the one that Mnuchin and Calabria were working on previously. And so that the second timeline

is a little bit more revelant. And I, I believe that they had a capital raise taking place in 2000 and, and 25. And in that timeline they had three different scenarios. And, and those scenarios vary based upon what the capital requirements for these companies were going to be. And I want to say that the the three scenarios were I think it was about 2 1/2 and in the low of 4% in the mid and something like 5 1/2 to six in the high case.

And since that report was published, they've already sort of locked in what the capital requirements are are going to be. It's going to be closer to that 4% range that that mid case. It has the CBO outlines in that in that case that the junior preferred securities which were invested in or are are basically completely covered and in most cases likely reinstated higher coupons, ones likely to be

refinanced down the road. The only scenario where the the that there might be some impairment to the preferred equities at least in this report is in that high case where they have that 5 1/2 to 6% capital requirement. But I, I think that most would would rule that out. I mean, and, and, and instead point to the low case, the, the 2 1/2 percent requirement. That is actually pretty similar to where Farmer Mack is. You, you may know Farmer Mack.

It's a GSE publicly traded. They're at about 2 1/2% of assets because of what Fannie and Freddie went through. We probably want to see them starting there. But that that's a good report and and worth looking at if you're interested to learn more about the the timeline and and how things can play out and from an incentive. Standpoint if they were released. From conservatorship some. Of the argument is that they would have an incentive to compress the spread on on

mortgage rates, right? Which presumably is in the country's interest now. Absolutely. Yeah, absolutely. So historically, the, the 30 year mortgage rate has traded at about 150 to 160 basis point premium to the, the, the 10 year treasury. It's not a perfect comparison. The average duration of mortgages has, has historically been about 7-8 years, but it's a, it's a good proxy. So historically 15160 spread.

However, when they were sort of out of the market because they were placed in the conservatorship that the feds stepped in and, and filled that gap. However, ever since they sort of entered into QT starting in 2022 and they've been a net seller and a net buyer, we've seen this historically wide gap. But between where the 30 year mortgage rate is in the, in the 10 year. And in fact, we've seen it kind of in the two 5260 range, right?

I mean, right now the 10 years at 4-5 and you know, depending on what channel you're looking at, you know, mortgage rates are, are closer to to seven. So if you were to, you know, complete the recap of the release of Fannie and Freddie, give them a little bit more capital, give them the ability to go into the, the market and compress spread back to a more normal level. That could provide a lot of relief to borrowers and, and, and help out with the

affordability equation. I mean, we ran some numbers and the difference to a borrower over the average life of a load is something like 25 to $26,000 it in terms of interest and principal payments. So we think it could make a, a,

a big difference. And in addition to that, to the extent that this is effectuated and in 2025 or or 26, the the Treasury will will recoup a significant amount of capital either through their senior preferred, the facility that remained outstanding or their warrants or a combination of the two. And that could be helpful.

And in terms of reconciling that the budget or potentially freeing up some capital to be invested in affordable housing really throughout the the country, I mean to the extent that you. Argue that mortgage duration is pushed out because refinancing is down. I'm in the 30 year treasury is what like 46457 today? Yeah, it's. Still a big spread over the 30. Year it it is and and you know. There are different components

that are built into that, right. I mean, you have, you know, the option adjusted spread and you know, volatility has been higher and that could lead to some of the additional spread. But if you look at volatility as measured by like the move index, it it's really come back in, but that that spread has remained. Yeah, you know that that should certainly be a a focus. But yeah, I think there are there are a lot of benefits of of wrapping up this conservatorship process.

But compressing nest bread, which at the end of the day is, is part of their mandate right to promote affordability and foster liquidity and the residential markets. And they're arguably not completing that, that mandate right now in the in the current form. And then to the extent that the and what is preventing them from? Doing it in the current they

have caps They they they have. Caps in place in, in terms of how much of their assets they can invest and, and MBS as well as caps that they can provide to, to multi family. And those could be adjusted upwards. And, and, and given the profitability of, of the companies, given the net worth that these companies have built, they, you know, should have a mandate to be able to probably increase some of their holdings going going forward.

Not that it's going to go back to where it was in 2006 or, or or seven, but they certainly have the capacity to do a little bit more interesting. It's a It's a thesis I've heard for so long that it's fallen on deaf ears and probably shouldn't

have. Well, I mean, there have been some probably unexpected and and unsettling rulings related to some of those lawsuits of them and that were sweep there are very frustrating and I think there were a lot of people involved with this for for quite some time that were were very

disappointed with this. This SCOTUS ruling was originally I, I guess Collins versus minutia when they ruled on it was Collins versus Yellen where they, they basically determined that this structure and, and their, that the agency overseeing the conservatorship, the FHFA was unconstitutionally structured. But they didn't provide any relief to vanities. And Gorsuch didn't write the opinion there. Alito did, but Gorsuch wrote sort of an argument for providing relief.

And what he sort of called for was putting these companies back in a position where they would have been had this net worth sweep really never taken place. And to the extent that something like that would be effectuated, you basically would have the senior preferreds redeemed. You would have the amount of excess payment that's gone to the treasury paid back to the the the companies, probably by adjusting the strike price on

the warrants upwards. And and then the companies would be sort of free to to exit conservatorship, which would have been beneficial for not only that the preferred equity junior preferred, but also for that the common stock. However, because of that ruling, as well as probably the federal claims court ruling, it, at least in our opinion, it seemed less likely that there would ultimately be value for the

common stock. However, depending on on how the process plays out that that may change. But we've, we've taken the slightly more conservative

route. We think it, it focused in on that the junior preferreds, which even though they, you know, that moved up pretty considerably after the election, they still trade at, you know, 40-45 cents of, of par value when you factor in some of the damages that the entities actually are likely to receive because of some rulings that have gone in their favor in recent years.

So it's, it's still remains a a very interesting security in our, in our view at less than 50% of par with a likely exit over the next three to four years. Are there reasons that? Other funds can't own them. Like is there a structural reason why there wouldn't be a bid on these or is it just kind of out, not something people are really paying attention to? Yeah, I mean, I think there are.

Other funds that probably don't have the flexibility within their their mandate to invest in preferreds as well as unsecured convertible did. I remember when we were coming out of the GFC, we invested about 15% of the the funds capital and RE debt, whether it was bank debt or convertible bonds or or unsecured debt. And they were very, very

profitable investments. And what we found is that a lot of our peers actually couldn't do that because it wasn't in their sort of portfolio guidelines at that at that point. And a lot of them change that. They have that flexibility now. But I would imagine there are a lot of mutual funds out there that they can't invest in preferred equity also. But it's not a, it's, it's not a REIT per SE. I mean, this is a, a, a real estate operating company, more of a real estate finance

business. And so for dedicated real estate investors that don't do much in C corps, they're probably not looking at at Fannie and Freddie. And and also, I mean, because the company's in conservatorship and it's been such a long drawn out process, there are, you know, probably people that have just, you know, have fatigue and then moved on from it. So yeah, I think there are probably some structural barriers out there, but you know, over time, hopefully those are addressed.

Yeah, interesting. I do want to close. By asking you. Why there's no like tower Reit's in your portfolio that I that I can think of. They're very sexy. Why not as long term? Value investors in the real estate space, we really focus in on companies that are online, have durable businesses, durable asset values and ones that we can get comfortable with over an

extended amount of time. And when we look at that the tower business, it's just one where we've been a little bit more hesitant to invest capital because historically, I mean they've traded at you know, 35 to to 40 times free cash flow. And if you dig through the the 10 KS on these companies, you'll actually find that they don't truly own all of their assets. And in fact, some of the big carriers have option contracts to, to repurchase certain parts of their portfolio.

And also a significant portion of these companies towers have ground leases on them. So it's not a, a freehold

situation. So for us to pay 35 to to 40 times free cash flow for a, a business where they don't actually own all of the assets and own the, the ground underneath them, that, that was something that we were hesitant to do. But that was tough to live through, especially when the tower companies were really benefiting from the 5G craze and the 5G5G build out similar to what what's going on in the the data center space today.

But that the multiples for the tower companies have actually come back in and, and they're kind of trading now in that 20 to 25 times free cash flow range depending on which company you look at, which is a little bit more more tolerable. However, the issue is they're like most REITs now, they're not getting much top line growth, particularly in the US, just given the pressure some of the the large carriers, their large

tenants are under. And in addition to that, these are some of the more lever real estate related companies out there. I mean, if you look at the net debt to EBITDA ratios for the tower companies, they're kind of in the 8 1/2 to to 9 1/2 times range significantly higher than the the broader real estate space. And so they're rolling that debt at at higher rates. And so it's chewing into the the free cash flows like some of these other property types that we we talked about earlier.

And the one other item that's always kind of just been on the radar as it relates to what the tower companies, no pun intended, are, are the low orbit satellites that are increasingly being launched, whether that's through Starlink, whether it's through the affiliated entity. And and so it's not immediate, but that could certainly create a substitute or a threat down

the road. So because of all those items, we just haven't felt comfortable, you know, paying those types of free cash flow multiples. But there's some really compelling arguments to own them. And it's really consolidated and I I'd say more interesting internationally than than here in the US at at this moment, which we've been a long time investor in Brookfield and Brookfield has been very active internationally consolidated. They've actually the largest

tower company in India now. So that's interesting. Cash flow multiples are much more tolerant. They just carved out a portfolio from American Tower, I think at like 6 or seven times EBITDA, but much different than what we see here. So yeah, we just haven't done much with the the pureplay tower companies in our our fund today. I used Starlink. During the hurricane in the aftermath and I found it to be quite good actually had a little

bit of video buffering. But I said to myself self, this gets a little bit more reliable and a little cheaper. I could definitely see it as absolutely.

I think it's only going to. Be on more people's radar and given the shift to we're expecting to continue from urban to suburban, even suburban to rural, it really changes that dynamic and a lot of those tertiary or markets that are plugged into to fiber or don't have, you know terrific tower service right now so yeah, that's something people should definitely have on their radar as they're underwriting or investing in the tower space in our opinion yeah well, it's.

It's like one of those things, the the, the multiples sort of imply that the duration is there and it's what is it? It's not what you know that gets you in trouble. It's what you know that just ain't so. That's a good point, yeah. So we'll see. Yeah, almost ready. Well, cool, man. I appreciate you. Stopping by. Thanks for working through some of the technical difficulties and appreciate it. Yeah. I'm glad that we could do. This yeah great to great to catch. Up with you.

And I've learned a lot from a number of your episodes, so hopefully there's a nugget or two in there that's useful for you and, and, and your followers. Well, it's good that you had some. Pushback on the REIT stuff. I I wish that I had dropped you in between some of those episodes, but alas, at least you're here to give the other perspective. So thank you. Yeah, of course. All right, have a good one and we'll. Chat soon? Yeah. Thanks so much.