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Ladies and gentlemen, welcome to
the Business Brew. 

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I'm your host, Bill Brewster. 
This episode features Ryan 

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Dobrats of 3rd Ave. 
Funds. 

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He stops by to talk about 3rd 
Ave's real estate strategy. 

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It's an interesting 
conversation. 

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It probably should have occurred
in the middle of the Reed 

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episodes. 
Think Ryan has some good 

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counterpoints to some of the 
REIT structure and I kind of 

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wish that I had dropped it then,
but alas, things are not perfect

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and here you are. 
I think this is a very 

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interesting conversation. 
I enjoyed speaking with him and 

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I hope that you will enjoy 
listening. 

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As always, none of this is 
financial advice. 

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Everything contained in this 
program is for entertainment 

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purposes only. 
Please consult your financial 

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advisor before making investment
decisions. 

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Do your own due diligence and 
the information in this 

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interview represents the 
opinions of Ryan Dobrats and is 

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not intended to be a forecast of
future events, a guarantee of 

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future results or investment 
advice. 

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Views expressed are those of 
individual and may differ from 

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those of other portfolio 
managers or of 3rd Ave. as a 

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firm as a whole. 
Investors should consider the 

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investment objectives, risks, 
charges, and expenses carefully 

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before investing. 
The 3rd Ave. funds are offered 

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by prospectus only. 
The prospectuses and summary 

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prospectuses are available on 
3rd Ave's website or by calling 

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1-800-443-1021. 
Read the prospectus or summary 

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prospectuses carefully before 
investing. 

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Read the docs folks, you know 
the drill. 

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Read the docs. 
Anyway, hope you enjoy the 

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episode. 
OK, bye. 

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So, ladies and gentlemen, 
thrilled to be joined by Ryan 

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Dobratz of 3rd Ave. 
How's it going, Ryan? 

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That's going Bill, great to be 
with you today. 

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Nice to have you. 
I tell you, one of the things 

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when I was reading your letters 
that I was super jealous of is 

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your signature. 
I'd like to just be Bill and 

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have that kind of like your 
penmanship is good and it's 

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crisp and it's just Ryan. 
I was like, that's dope. 

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I like that. 
Like. 

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I appreciate that I I see that 
in your future. 

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It may be, I don't know. 
My my signature looks like 

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chicken scratch. 
When did you just go with Ryan? 

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When I stopped writing checks. 
There you go. 

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Yeah. 
I used to go by Billy and then I

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went to, I went to work at like 
a Bank of Montreal. 

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It was B MO Harris. 
But anyway, they were like, you 

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can't be Billy until you've done
something. 

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So then I became Bill and then I
never went back. 

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But I I kind of miss like Billy 
Brewster had a good ring to it. 

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Oh, well, maybe maybe if I make 
it again, I'll go back to Billy.

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We'll see. 
So anyway, you want to describe 

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what you do? 
Yes, sure. 

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You know, I've been at 3rd Ave. 
management now for for about 18 

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years now, a portfolio manager 
focus on the real estate value 

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fund. 
The the real estate value fund 

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was launched in 1998. 
Today I manage it with Jason 

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Wolf, but kind of took an 
interesting route to to get 

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here. 
I started off at the University 

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of Missouri was there in the 
late 90s and early few. 

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Yeah, I like Mizzou. 
Mizzou has called has had a a 

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resurgence of sorts. 
And when I was in Business 

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School there my last semester, I
was so lucky. 

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I took this class, semester long
course focused on Warren 

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Buffett. 
And it was funded by a great 

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guy, Harvey Eisen that wrote 
Bedrock Capital out outside of 

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New York. 
But he paid for it out of his 

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own pocket for, for US students 
at Missouri to take it. 

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And it really just opened my 
eyes to to so much. 

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I mean, amazing to read the 
Warren Buffett way and the 

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Warren Buffett shareholder 
letters as textbooks. 

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And as part of that class bill, 
there was a speaker that came to

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us to present at the end of the 
semester. 

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His name was Scott Moore and he 
was at that point running the 

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value funded American Century, 
which is based out of Kansas 

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City. 
And I really enjoyed his 

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presentation. 
I, I went up and, and spoke to 

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him afterwards and I said, if I 
wanted to get into your seat 

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down the road, what would you 
kind of recommend? 

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And he said, it's probably 
pretty challenging. 

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There's not a lot going on in 
investment management business 

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in this area. 
But if you, if you really want 

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to get into the business, I 
would tell you to choose one. 

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Go learn an industry and had 
learned it very, very well 

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because you'll become an expert 
for that and a resource to 

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others. 
And it will also be easier for 

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you to pick up other industries 
as you go down the road. 

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And he said to go get your CFA. 
And both of those pieces of 

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advice were, were terrific in 
retrospect. 

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And so after that I, I started 
to look into the CFA. 

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I, I graduated from a zoo. 
I joined up with Ernst and 

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Young. 
I was originally part of their 

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cash management practice, which 
was a, a great business. 

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They were kind of the go to 
advisor for financial 

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institutions, insurance, banks, 
etcetera to to maximize their 

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interest income. 
That was kind of the projects 

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they were signed up for. 
However, when I joined them, it 

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was right after 911 and in 
Greenspan had had cut rates and 

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so there wasn't a lot to do. 
And I got reassigned to a 

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Sarbanes-Oxley project and I got
sent to Milwaukee in the middle 

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of winter. 
And I was working on an 

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insurance company and going 
through their controls. 

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And while it was sort of 
interesting, it wasn't really 

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what I what I signed up to do. 
And at about that same time, I 

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reconnected with someone that I 
knew from Kansas City who worked

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at Morningstar. 
His name is Mike Trigg. 

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Mike. 
Yeah. 

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Mike. 
Yeah. 

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Do incredible things that WCM 
with some other Morning Star 

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people that followed him out 
there. 

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But I I connected with Mike and 
he told me that Morningstar was 

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what was in the process of 
hiring and he kind of knew I was

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interested in value investing. 
And so I sit in my info had an 

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opportunity to to interview a 
few different times when was 

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taking the train from Milwaukee 
to to Chicago in in between my 

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my role and Ernst Young to talk 
to them. 

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But ultimately took that, that 
job and so I moved to Chicago 

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and I got a side to their, their
real estate group. 

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And I didn't have real estate 
experience at the time per SE, 

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but I grew up around real 
estate. 

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My, my grandpa worked in 
construction, my dad did a lot 

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of real estate tax and and and 
finance. 

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So it, I, I picked it up pretty 
quickly and I ultimately was 

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covering kind of 3035 different 
companies. 

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And after about a year in, I 
realized they're really only 

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four or five of these companies 
that are, are, are really 

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interesting. 
I mean, that own, you know, 

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really high quality assets that 
have thoughtful management teams

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that are, you know, redeploying 
capital, creating value. 

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And one of the other things that
those companies had in common is

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was Third Ave. was one of, if 
not the largest shareholder of, 

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of each of those businesses. 
So that's how, how 3rd Ave. kind

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of got on my radar. 
And so this was called, call it 

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2000 and, and five. 
And so I, I got onto 3rd Ave's 

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website and came across their 
shareholder letters. 

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It's something that, that the 
firm has historically, you know,

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put a lot of time and effort 
into. 

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And I, I read those shareholder 
letters and I learned more about

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real estate and value investing 
in, in, in parsing through those

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letters than than really 
anything else. 

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And at, at one point I, I got on
there and realized that Marty 

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Whitman had written a number of 
value investing books. 

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And so I went out and got those 
books. 

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I, I really identified with his 
kind of safe and cheap or modern

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value approach to, to investing.
And ultimately I, I got onto the

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website one day to, to download 
the, the updated letters and 

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there was a, a job posting for 
a, for a real estate analyst 

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opportunity. 
And so I basically fell out of 

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my chair when I, when I saw that
I didn't have a resume put 

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together at at that point, had 
no plans of leave, you know, 

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leaving morning. 
Sorry. 

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It was a it was a great role, 
great, great group, but that was

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a, a fat pitch opportunity in my
mind. 

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So I went home, put together a 
resume, sent it in, connected 

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with Jason Wolf, had a great 
conversation with him. 

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And then he ultimately had me up
to New York, met the rest of the

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group there. 
And probably within a month I 

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was moving from Chicago to New 
York to, to work for 3rd Ave. 

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And that was 2006. 
And so it's a. 

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Shame that you downgraded 
cities, but I forgive you. 

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Well, you know, interestingly, 
I, you know, I, if, if you were 

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to look at the backdrop behind 
me, you may pick up on the fact 

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that it's, it's not New York, 
it's it's actually Austin, TX. 

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And we could definitely get into
that. 

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But about seven years ago I 
moved down here to open an 

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office for us. 
It's been very strategic for us 

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on the residential real estate 
from well, I mean, we're 

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basically within two hours of 
four out of the top 6 building 

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markets in the country. 
Yeah. 

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And it just gives us some boots 
on the ground at a different 

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perspective. 
Paid off particularly well. 

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I think coming out of the the 
pandemic, it's very helpful to 

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get out and go visit some of the
sites. 

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I mean, I can go see what's 
going on at some of the Dr. 

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Horton and Lennar communities. 
I can see what kind of HVAC's 

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they're installing. 
I could talk to the sales 

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people. 
It's, it's been really 

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beneficial. 
It's also actually been helpful 

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to avoid certain things. 
There's I I think been a 

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narrative that Sunbelt office 
is, is OK. 

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People are back in, in, in the 
office and certainly utilization

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rates are up, but they're 
nowhere near where they were pre

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pandemic. 
And I mean, if you can see some 

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of these office buildings behind
me, they're either half leased 

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or fully leased but not being 
utilized. 

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There's just a ton of access 
space. 

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So I think it's been helpful 
many unexpected ways. 

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But yeah, I've been down here 
for for seven years, but been at

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3rd Ave. for for 18 now. 
Yeah. 

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So with Office, right, I mean, I
am pretty certain that I'm going

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to characterize Marty correctly.
So, but if I don't, please 

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correct me because you know 
better than I do. 

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But a lot of what I perceived 
him to do was look at asset 

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values and think about, OK, well
what's the future earnings power

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that this asset base might be 
able to create. 

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And you look at the amount of 
capital that's in office and I 

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think it's kind of easy to say, 
OK, well maybe this look at the 

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assets, what should they earn. 
But to your point, like the 

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current outlook is not good. 
How do you think about what is 

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too hard to forecast in office 
versus when it might get sort of

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exciting? 
Because I, I do think like 

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office fundamentally has some 
purpose and the probability of 

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just from like a capital cycle 
theory, there's not a whole lot 

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of capital flowing into it. 
But the economics also seem too 

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hard. 
I don't quite know the right way

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to frame this, but there's a lot
of sunk capital in office and a 

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lot of it is underutilized, 
right. 

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And on, on one hand, I look at 
the asset base and think, well, 

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for good properties there should
be a future here. 

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And I sort of like the idea of 
the capital cycle working in 

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your favor because a lot of 
incremental capital is not going

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00:11:18,240 --> 00:11:21,560
into office, it doesn't seem. 
On the other, the current 

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00:11:21,560 --> 00:11:26,800
economics are so uncertain. 
So I'm kind of curious how you 

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00:11:26,800 --> 00:11:31,840
think about putting things in a 
too hard pile versus when you 

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see an asset base that you say, 
OK, I, I can kind of see how the

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earnings power can grow from 
here just like philosophically. 

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You know what, absolutely. 
I mean we operate with a 

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contrary mindset and and so 
we're naturally interested in 

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situations such as what offices 
is going through today. 

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And I, I think we certainly 
believe in the, the narrative 

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that is out there that suggests 
that the high quality, well 

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located modern buildings will 
ultimately take market share as 

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tenants move to those more 
desirable properties, sort of 

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leaving the B&C property types 
underutilized and, and, and 

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probably more fit to, to be, you
know, repurposed or put to a 

227
00:12:20,360 --> 00:12:22,120
higher and, and, and, and better
use. 

228
00:12:22,800 --> 00:12:26,600
And so as a result, you could 
theoretically do well by 

229
00:12:26,600 --> 00:12:30,520
focusing it on those Class A 
locations and we'll continue to 

230
00:12:30,520 --> 00:12:33,520
to monitor those opportunities. 
But you know, one of the the 

231
00:12:33,520 --> 00:12:37,520
issues with office is that it's 
incredibly capital intensive, 

232
00:12:37,520 --> 00:12:41,280
right, because you're paying 
very significant CapEx dollars 

233
00:12:41,280 --> 00:12:44,160
for tenant improvements for for 
leasing commissions. 

234
00:12:44,160 --> 00:12:48,400
And as a result of that you're 
sort of after CapEx return can 

235
00:12:48,400 --> 00:12:51,920
often be be diminished. 
The one other thing that we're 

236
00:12:52,040 --> 00:12:55,760
probably more cautious on 
relative to others that have 

237
00:12:55,760 --> 00:12:59,640
sort of bought back into the 
office space, it is, is that we 

238
00:12:59,640 --> 00:13:02,200
think that property taxes for 
these Class A locations, 

239
00:13:02,200 --> 00:13:05,040
particularly in the gateway 
cities is going to go up pretty 

240
00:13:05,040 --> 00:13:08,040
tremendously. 
And while you ultimately do pass

241
00:13:08,040 --> 00:13:11,200
that through to the tenants, I 
think that that will sort of put

242
00:13:11,200 --> 00:13:13,320
a governor on how high rents can
go. 

243
00:13:13,640 --> 00:13:16,960
But historically, financial 
service firms, they may pay 6 to

244
00:13:16,960 --> 00:13:20,240
7% of their their revenues and 
rents and we don't see that 

245
00:13:20,240 --> 00:13:23,360
going to 10:50 percent. 
So if, if taxes are, are, are 

246
00:13:23,360 --> 00:13:26,160
going up as these cities, you 
know, need to fill their budget 

247
00:13:26,160 --> 00:13:29,520
deficits, that could impact the 
economics of, of owning office. 

248
00:13:29,520 --> 00:13:31,760
And So what we've done is we've 
taken a little bit of a 

249
00:13:31,760 --> 00:13:35,000
different approach and we've 
really focused in on the real 

250
00:13:35,000 --> 00:13:38,760
estate services companies. 
These are the CBRES, these are 

251
00:13:38,760 --> 00:13:42,440
the, the Jones flank, Lasalle's,
the Savils of the world who 

252
00:13:42,920 --> 00:13:48,040
historically have really made 
most of their money from 

253
00:13:48,440 --> 00:13:49,960
transacting to real estate, 
right? 

254
00:13:49,960 --> 00:13:53,880
They get paid to lease, they get
paid to oversee financings, they

255
00:13:53,880 --> 00:13:56,240
get paid for capital markets 
transactions. 

256
00:13:56,240 --> 00:13:59,160
But over the past kind of 10 to 
12 years, they've also built up 

257
00:13:59,200 --> 00:14:02,920
pretty substantial recurrent 
cash flow streams doing property

258
00:14:02,920 --> 00:14:05,360
facilities management, 
investment management, etcetera.

259
00:14:05,360 --> 00:14:08,240
So they're more diversified 
today, but their earnings are 

260
00:14:08,240 --> 00:14:10,600
are depressed because of the 
volatility that we've seen that 

261
00:14:10,600 --> 00:14:13,800
in the real estate capital 
markets because the lack of 

262
00:14:14,080 --> 00:14:16,640
leasing transactions with all 
the uncertainty out there. 

263
00:14:16,920 --> 00:14:20,400
But as the demand starts to to 
come back to market, we think 

264
00:14:20,400 --> 00:14:23,600
that those companies are are 
poised to be ones that that 

265
00:14:23,600 --> 00:14:27,640
really put up the earnings 
growth, the cash flow growth and

266
00:14:27,880 --> 00:14:31,400
ultimately increase the the 
underlying value as as things 

267
00:14:31,400 --> 00:14:34,280
unfold. 
That makes sense to me. 

268
00:14:34,680 --> 00:14:38,640
One of the sort of questions 
that I that I come to is that 

269
00:14:38,640 --> 00:14:42,800
there's the value sort of 
investor studies that say like 

270
00:14:42,800 --> 00:14:47,160
the lowest decile companies are 
the ones that do the best as a 

271
00:14:47,480 --> 00:14:50,520
valuation wise, right? 
Lowest decile does the best 

272
00:14:50,520 --> 00:14:53,440
because of I guess the 
improvements make the stocks go 

273
00:14:53,440 --> 00:14:57,400
higher. 
When you think about like CBRE 

274
00:14:57,440 --> 00:15:02,760
is a high return on capital, 
higher multiple business versus 

275
00:15:02,840 --> 00:15:06,960
office theoretically is at well,
not theoretically it is a lower 

276
00:15:06,960 --> 00:15:10,000
return on capital business and 
trades at a lower multiple. 

277
00:15:10,320 --> 00:15:15,000
So how do you think about sort 
of like trading up in quality 

278
00:15:15,280 --> 00:15:19,040
and paying more to do so? 
I mean, I, I, I fundamentally 

279
00:15:19,040 --> 00:15:21,240
think it makes sense. 
I'm just kind of curious to hear

280
00:15:21,280 --> 00:15:23,920
how you think about it if. 
If you look back at you know, 

281
00:15:23,920 --> 00:15:27,720
the 26 years of our our 
strategy, I think you will have 

282
00:15:27,720 --> 00:15:33,800
seen us migrate from some of the
more statistically cheap real 

283
00:15:33,800 --> 00:15:37,880
estate companies over to some of
the the real estate companies 

284
00:15:37,880 --> 00:15:41,400
that are compounding the 
underlying that asset value of 

285
00:15:41,400 --> 00:15:44,160
the business underlying 
intrinsic value, however you 

286
00:15:44,160 --> 00:15:45,960
want to refer to it. 
And we can go into this little 

287
00:15:45,960 --> 00:15:47,720
bit more. 
But I I think Marty actually 

288
00:15:47,880 --> 00:15:51,000
made that same transition over 
the the course of his career 

289
00:15:51,480 --> 00:15:54,040
where, you know, a third Ave. 
we've always focused on well 

290
00:15:54,040 --> 00:15:57,880
financed, well managed companies
that treat at discounts to 

291
00:15:57,880 --> 00:16:00,160
conservative estimates of that 
asset value. 

292
00:16:00,400 --> 00:16:03,080
What people I don't think 
appreciate is that in the last 

293
00:16:03,080 --> 00:16:05,400
kind of 10 to 12 years of 
Marty's career, he really 

294
00:16:05,400 --> 00:16:08,720
emphasized the 4th pillar and 
that is companies that are also 

295
00:16:08,720 --> 00:16:13,200
compounding NAV by 1010% or more
per year when including 

296
00:16:13,200 --> 00:16:15,360
dividends. 
And, and so that way if the, you

297
00:16:15,360 --> 00:16:17,960
know, discount remains, you're 
still making 10% a year as the 

298
00:16:17,960 --> 00:16:21,400
underlying value compounds. 
And we've made that, that, that 

299
00:16:21,400 --> 00:16:24,600
sort of same migration because 
when you look at some of these 

300
00:16:24,600 --> 00:16:26,400
real estate companies, 
particularly if they're in 

301
00:16:26,400 --> 00:16:29,800
commodity property types and you
factor in that the CapEx and the

302
00:16:29,800 --> 00:16:33,080
T is that we talked about 
earlier, the returns aren't as 

303
00:16:33,080 --> 00:16:37,400
compelling as, as they may seem.
The the one other thing here 

304
00:16:37,400 --> 00:16:39,680
and, and, and this applies to a 
lot of the office companies, the

305
00:16:39,680 --> 00:16:43,640
office REITs is that they're 
also, you know, already fairly 

306
00:16:43,640 --> 00:16:46,920
leveraged with debt that's at, 
at pretty low cost. 

307
00:16:46,920 --> 00:16:50,200
However, it's rolling over the 
next four to five years. 

308
00:16:50,200 --> 00:16:53,720
And and so to the extent that 
they can't drive the top line 

309
00:16:53,720 --> 00:16:56,080
higher, you're going to see that
interest expense reset and 

310
00:16:56,080 --> 00:16:58,040
really chew up some of those, 
those cash flows. 

311
00:16:58,440 --> 00:17:00,440
So that's another thing that 
makes us a little bit more 

312
00:17:00,440 --> 00:17:03,000
cautious on, on some of these 
office companies. 

313
00:17:03,000 --> 00:17:07,440
And we'd much rather be in a, a 
company like CBRE that you know,

314
00:17:07,480 --> 00:17:12,480
is trading at in maybe 14 to to 
15 times earnings based upon a 

315
00:17:12,480 --> 00:17:14,200
rebound of their transaction 
activity. 

316
00:17:14,560 --> 00:17:19,000
And a, a lot of that cash flow, 
6065% of that cash flow is now 

317
00:17:19,160 --> 00:17:22,119
recurring in nature because they
are on the long term contracts 

318
00:17:22,119 --> 00:17:24,599
and property management, 
facilities management, not much 

319
00:17:24,599 --> 00:17:27,880
CapEx, their capital light like 
you said, in fact the cash flow 

320
00:17:27,880 --> 00:17:31,120
stream may be more desirable 
than an 8 to 10 year office 

321
00:17:31,120 --> 00:17:32,760
lease. 
So those are things that we 

322
00:17:32,760 --> 00:17:34,840
waive it at the end of the day, 
what we're doing and when we 

323
00:17:34,840 --> 00:17:39,360
underwrite these companies, 
we're looking at sort of low, 

324
00:17:39,360 --> 00:17:42,560
mid and high case net asset 
value estimates for for every 

325
00:17:42,560 --> 00:17:45,720
one of the businesses. 
Generally we're trying to buy in

326
00:17:45,720 --> 00:17:49,640
plus to our low case and and 
trim it back and exit closer to 

327
00:17:49,640 --> 00:17:52,440
our our high case. 
But in addition to looking at 

328
00:17:52,440 --> 00:17:56,240
the Nabs, we try to come up with
sort of a, an IRR and looking at

329
00:17:56,240 --> 00:17:59,480
what that NAB will do over the 
expected holding period. 

330
00:17:59,480 --> 00:18:02,280
You know that may be four or 
five years and then make a risk 

331
00:18:02,280 --> 00:18:05,400
adjustment to that to come up 
with our expected risk adjusted 

332
00:18:05,400 --> 00:18:09,400
return for, for a business. 
And then within the fun try to 

333
00:18:09,480 --> 00:18:11,720
concentrate our capital 
prudently concentrated around 

334
00:18:12,000 --> 00:18:15,280
some of those highest risk 
adjusted return opportunities. 

335
00:18:15,280 --> 00:18:17,960
And in our view, CBRE is 
certainly one of them. 

336
00:18:18,760 --> 00:18:23,720
Now when you say NAV is that, I 
mean do you use that in that way

337
00:18:23,720 --> 00:18:26,080
that some people might call 
private market value or 

338
00:18:26,080 --> 00:18:30,440
something like that? 
Yeah, that's certainly one of 

339
00:18:30,440 --> 00:18:34,440
the components. 
So when we talk about the range 

340
00:18:34,440 --> 00:18:39,600
of Nabs, the kind of low, the 
mid and the high case or high 

341
00:18:39,600 --> 00:18:43,440
case NAV will typically be the 
private market transactions, 

342
00:18:43,440 --> 00:18:46,640
what a controlled buyer is 
willing to to pay for the 

343
00:18:46,640 --> 00:18:49,160
business. 
On the flip side, if we're 

344
00:18:49,160 --> 00:18:51,160
talking about a commercial real 
estate company, our low case may

345
00:18:51,160 --> 00:18:55,440
be replacement cost that's 
generally a, a decent proxy, a 

346
00:18:55,440 --> 00:18:58,880
good safety net. 
And then our our mid case, it is

347
00:18:58,880 --> 00:19:02,160
usually sort of a mid cycle cap 
rate or, or or cash flow 

348
00:19:02,160 --> 00:19:05,400
multiple. 
And so we used sort of different

349
00:19:05,400 --> 00:19:07,480
benchmarks for different types 
of businesses. 

350
00:19:07,480 --> 00:19:09,800
But for commercial real estate 
business, that's kind of how we 

351
00:19:09,800 --> 00:19:13,480
think about the low, the mid and
the high replacement cost, mid 

352
00:19:13,480 --> 00:19:16,800
cycle cap rate and then what a 
control buyer would pay for the 

353
00:19:16,800 --> 00:19:18,240
business. 
I think where some of those 

354
00:19:18,400 --> 00:19:22,280
asset light businesses, you 
know, when, when you think about

355
00:19:22,280 --> 00:19:28,320
the statement of conservative 
appraisal of value, the asset 

356
00:19:28,320 --> 00:19:33,840
light gives you potentially a 
more bankable to the extent 

357
00:19:33,840 --> 00:19:36,720
anything in the world is 
bankable, but earning stream to 

358
00:19:36,720 --> 00:19:39,880
actually base the valuation off 
of, right. 

359
00:19:39,880 --> 00:19:43,440
Whereas some of the more capital
intensive to your point, if if 

360
00:19:43,440 --> 00:19:46,600
you have to come out of pocket 
for tenant improvements, what 

361
00:19:46,600 --> 00:19:49,760
you may think cash flow is, you 
may wake up and be like, oh, I 

362
00:19:49,760 --> 00:19:53,600
was way off of what my estimated
cash flows were in more in some 

363
00:19:53,600 --> 00:19:55,760
of the more asset heavy 
businesses I feel like. 

364
00:19:56,480 --> 00:19:58,760
Yeah, that's, that's fair. 
And then you know the other 

365
00:19:58,760 --> 00:20:04,400
component to some of these asset
light businesses such as CBRE is

366
00:20:04,400 --> 00:20:06,480
if they are really well 
capitalized. 

367
00:20:06,720 --> 00:20:10,440
And they're very well managed. 
They tend to take market share 

368
00:20:10,440 --> 00:20:13,040
when industry conditions are are
are challenged. 

369
00:20:13,040 --> 00:20:16,560
And one of the other things that
gets us excited about where CBRE

370
00:20:16,560 --> 00:20:19,840
and JLL sit is that one of the 
largest players out there, I 

371
00:20:19,840 --> 00:20:21,760
won't name the name, but the 
third largest player in kind of 

372
00:20:21,760 --> 00:20:24,000
the real estate services 
brokerage space is not that well

373
00:20:24,000 --> 00:20:26,880
capitalized. 
And with the reduction in 

374
00:20:26,880 --> 00:20:29,440
transaction activities, their 
businesses under a little bit of

375
00:20:29,440 --> 00:20:33,400
pressure and we've seen them, 
you know, lose some key 

376
00:20:33,400 --> 00:20:35,760
producers and lose some key 
mandates. 

377
00:20:35,760 --> 00:20:39,000
And those people are migrating 
over to the the best in class 

378
00:20:39,000 --> 00:20:42,040
companies of CBRE and Jol, you 
know, are, are taking more 

379
00:20:42,040 --> 00:20:45,080
share. 
And, and so not only are they 

380
00:20:45,080 --> 00:20:50,480
likely to get back to, you know,
peak earnings when transaction 

381
00:20:50,480 --> 00:20:53,480
activity does rebound, but that 
they should actually likely 

382
00:20:53,480 --> 00:20:56,880
surpass that. 
And, and that's one of the 

383
00:20:56,880 --> 00:20:58,240
things that we've really seen 
out. 

384
00:20:58,320 --> 00:21:02,160
If you go back to sort of the 
GFC, we got involved with the 

385
00:21:02,400 --> 00:21:06,200
title insurance space and there 
historically were three big 

386
00:21:06,200 --> 00:21:07,960
players in that going into the 
GFC. 

387
00:21:07,960 --> 00:21:11,880
It was Fidelity National, First 
American and then Land America. 

388
00:21:12,200 --> 00:21:14,800
LFG was the the, the ticker and 
they didn't make it through the 

389
00:21:14,800 --> 00:21:18,080
GFC. 
And the bulk of that market 

390
00:21:18,080 --> 00:21:21,240
share migrated to the F&F and 
Faf. 

391
00:21:21,240 --> 00:21:25,400
And then some other players like
like Stewart, Old Old Republic 

392
00:21:25,400 --> 00:21:27,000
picked up share. 
But those that are well 

393
00:21:27,000 --> 00:21:29,840
capitalized and well managed 
will will probably survive those

394
00:21:29,840 --> 00:21:34,000
challenging moments and 
ultimately emerge more valuable 

395
00:21:34,000 --> 00:21:36,440
and more profitable. 
Yeah, that makes sense. 

396
00:21:37,080 --> 00:21:39,760
And then I guess the other side 
of it is when things are good, 

397
00:21:39,760 --> 00:21:42,320
sometimes some producers leave, 
but they're not exactly. 

398
00:21:43,080 --> 00:21:46,160
I don't, I don't know that that 
takes the the enterprise value 

399
00:21:46,160 --> 00:21:48,600
down too much, right? 
That's true. 

400
00:21:48,600 --> 00:21:52,600
And, and, and for some of these 
businesses that are much more 

401
00:21:52,600 --> 00:21:55,760
dependent on, on the transaction
activity, that would certainly 

402
00:21:55,760 --> 00:21:58,520
be the case. 
But as I mentioned with CBRE and

403
00:21:58,520 --> 00:22:01,160
it's the same as the case for 
JLL and Savils, they've really 

404
00:22:01,160 --> 00:22:03,920
diversified their businesses 
coming out of the financial 

405
00:22:03,920 --> 00:22:05,600
crisis. 
They wanted some more recurring 

406
00:22:05,600 --> 00:22:08,160
revenue streams. 
And so they have focused on 

407
00:22:08,160 --> 00:22:10,920
these property management, these
facility management mandates, 

408
00:22:11,280 --> 00:22:14,800
investment management, etcetera.
And also, I, I mean, when 

409
00:22:14,800 --> 00:22:17,920
you're, when you're working with
these Fortune 100 or Fortune 500

410
00:22:17,920 --> 00:22:21,400
companies, brokers may leave, 
but ultimately that they, 

411
00:22:21,400 --> 00:22:23,920
they're giving the mandate to 
the franchise, They're giving 

412
00:22:23,920 --> 00:22:27,680
the mandate to CBRE because they
have relationships with them in 

413
00:22:27,680 --> 00:22:30,640
a certain market, but also in 
throughout their global 

414
00:22:30,640 --> 00:22:33,000
footprints. 
And that's really changed it. 

415
00:22:33,000 --> 00:22:35,920
What's really interesting to see
how significant the market share

416
00:22:35,920 --> 00:22:39,560
is growing. 
CBRE accounts for almost 25% of 

417
00:22:39,560 --> 00:22:42,560
global real estate transactions.
How, how promotional. 

418
00:22:42,680 --> 00:22:45,720
Yeah, yeah. 
And it's actually slightly 

419
00:22:45,720 --> 00:22:48,240
greater internationally than 
here in the US Have talked to 

420
00:22:48,240 --> 00:22:50,520
some smart people in the past 
and they actually compare what's

421
00:22:50,520 --> 00:22:52,960
going on in the real estate 
brokerage and services 

422
00:22:52,960 --> 00:22:56,960
businesses to what happened with
insurance brokerage resolve 

423
00:22:57,400 --> 00:23:00,920
significant consolidation. 
And I, I believe in that case 

424
00:23:00,920 --> 00:23:04,160
they, they ultimately 
consolidated up to about 7075%. 

425
00:23:04,680 --> 00:23:07,520
And and so there does seem like 
there's still room for growth, 

426
00:23:07,520 --> 00:23:10,640
particularly if the third 
largest player ultimately gives 

427
00:23:10,640 --> 00:23:13,960
up a lot of market share here. 
But yeah, very interesting 

428
00:23:13,960 --> 00:23:17,240
devolution and in that part of 
the real estate sort of value 

429
00:23:17,240 --> 00:23:21,920
chain and they've always been a 
sort of tollbooth on real estate

430
00:23:21,920 --> 00:23:24,360
transaction activities when 
these businesses have been 

431
00:23:24,360 --> 00:23:26,880
around for more than 100 years 
in most cases. 

432
00:23:26,880 --> 00:23:30,720
And a lot of other real estate 
investors don't own them. 

433
00:23:31,120 --> 00:23:33,720
And and that's because they're C
corps, they're not Reit's, 

434
00:23:34,080 --> 00:23:37,520
they're not held in a lot of the
the real estate benchmarks or or

435
00:23:37,520 --> 00:23:39,720
indices. 
And so I think we're one of the 

436
00:23:39,760 --> 00:23:43,160
few kind of real estate 
dedicated investors out there 

437
00:23:43,160 --> 00:23:45,720
that have a significant amount 
of capital invested in them. 

438
00:23:45,720 --> 00:23:49,160
It's probably about 15 to 60% of
our portfolio today, but we 

439
00:23:49,160 --> 00:23:51,760
think that they are superior 
businesses that own over, you 

440
00:23:51,760 --> 00:23:54,440
know the long term which is our 
focus kind of five to 10 years. 

441
00:23:54,480 --> 00:23:57,640
It does seem like at least from 
the letters that I've seen, 

442
00:23:57,680 --> 00:24:01,720
there is not much of A focus on 
Reit's or or I shouldn't say not

443
00:24:01,720 --> 00:24:06,480
a focus because but you choose 
or have chosen recently not to 

444
00:24:06,480 --> 00:24:09,440
own many Reit's. 
Is there a reason that you 

445
00:24:09,440 --> 00:24:13,520
prefer the C Corp like operating
company type as opposed to the 

446
00:24:13,520 --> 00:24:15,040
Reit's? 
Yeah. 

447
00:24:15,040 --> 00:24:20,880
So if you go back in time, 3rd 
Ave. has always favored the C 

448
00:24:20,880 --> 00:24:26,880
Corp model over the the the REIT
model because 1, 3rd Ave. 

449
00:24:26,960 --> 00:24:30,440
focuses on long term capital 
appreciation as opposed to 

450
00:24:30,440 --> 00:24:33,440
current income. 
While we like current income, we

451
00:24:33,440 --> 00:24:36,440
would much rather have the 
companies retain that capital, 

452
00:24:36,760 --> 00:24:40,600
reinvest in their business, 
compound the underlying NAB over

453
00:24:40,600 --> 00:24:42,080
over time. 
It's just more a more tax 

454
00:24:42,080 --> 00:24:44,040
effective way to compound 
capital in our view. 

455
00:24:44,200 --> 00:24:47,760
But in addition to that, it's a 
much more reliable and, and 

456
00:24:47,760 --> 00:24:50,840
safer business model and in, in 
our view, right, because the 

457
00:24:50,840 --> 00:24:53,240
real estate operating companies 
that are retaining capital, 

458
00:24:53,240 --> 00:24:57,360
they're self financing their 
expansion where a REIT is 

459
00:24:57,360 --> 00:25:00,600
required by law to distribute 
about 90 to 100% of their net 

460
00:25:00,600 --> 00:25:02,680
income, depending on the, the 
jurisdiction. 

461
00:25:02,680 --> 00:25:05,320
So to the extent that they want 
to go make a, a large scale 

462
00:25:05,320 --> 00:25:09,280
acquisition or they want to, you
know, fund, you know, a, a 

463
00:25:09,280 --> 00:25:11,920
pretty decent size refurbishment
project, they typically have to 

464
00:25:11,920 --> 00:25:15,160
go out to the capital markets. 
And while the capital markets 

465
00:25:15,160 --> 00:25:17,520
might be cooperative most of the
time, they're certainly not 

466
00:25:17,520 --> 00:25:21,120
cooperative all the time. 
And there are moments when the, 

467
00:25:21,120 --> 00:25:23,280
the, the real estate capital 
markets are locked up and those 

468
00:25:23,280 --> 00:25:26,400
reefs can't raise capital, but 
it puts them in a tough spot. 

469
00:25:26,920 --> 00:25:29,640
And if you were to go back and 
actually look, you know, reefs 

470
00:25:29,640 --> 00:25:31,440
have been around since the 
Eisenhower era. 

471
00:25:31,440 --> 00:25:33,520
He was the one that sort of 
passed legislation. 

472
00:25:34,080 --> 00:25:37,640
But they, they started to, to 
grow a lot in the 70s and the 

473
00:25:37,640 --> 00:25:41,160
70s was a more challenging 
period for real estate in the 

474
00:25:41,160 --> 00:25:44,360
first part of the decade because
it was more stagflationary, 

475
00:25:44,360 --> 00:25:47,120
right? 
And when you saw rates reset 

476
00:25:47,120 --> 00:25:50,200
higher and a lot of those Reit's
that were out there couldn't 

477
00:25:50,200 --> 00:25:52,680
raise new capital, they filed 
for bankruptcy. 

478
00:25:53,200 --> 00:25:56,480
And, and that was something that
Marty always kind of reminded us

479
00:25:56,480 --> 00:25:59,920
of. 
And as a result of that, he 

480
00:25:59,920 --> 00:26:03,640
would never really, he loved 
real estate, but he wouldn't own

481
00:26:03,640 --> 00:26:07,360
Reit's just because of his 
experience with REIT in the, in 

482
00:26:07,360 --> 00:26:10,880
the in the 70s. 
So when we launched our real 

483
00:26:10,880 --> 00:26:13,400
estate fund in 98, we also 
emphasize the real estate 

484
00:26:13,400 --> 00:26:16,240
operating companies over reeds 
and that's remain the case. 

485
00:26:16,240 --> 00:26:20,720
Historically, we've had probably
2/3 in Riox, 1 thirds at 1/3 of 

486
00:26:20,720 --> 00:26:23,880
the capital in, in reeds. 
Today it's even more 

487
00:26:24,520 --> 00:26:27,720
significant. 
We have about 80% in, in, in 

488
00:26:27,720 --> 00:26:30,200
real estate operating companies 
versus 20% of reeds. 

489
00:26:30,760 --> 00:26:34,520
And that's just because of some 
of those core principles that I,

490
00:26:34,760 --> 00:26:37,120
I outlined. 
But in addition to that, when 

491
00:26:37,120 --> 00:26:40,480
you look at the, the next kind 
of four to five years for 

492
00:26:41,280 --> 00:26:44,120
certain pockets of REITs and 
it's going to be challenging 

493
00:26:44,120 --> 00:26:47,560
because going back to office, 
it's hard to see a lot of top 

494
00:26:47,560 --> 00:26:50,840
line growth. 
At the same time, these interest

495
00:26:50,840 --> 00:26:53,320
rates that they had locked in 
previously are resetting at, at 

496
00:26:53,320 --> 00:26:55,560
higher rates and it's just 
chewing up cash flow. 

497
00:26:55,560 --> 00:26:57,080
It's going to be tough to create
value. 

498
00:26:57,080 --> 00:26:59,680
It wouldn't surprise us to see a
lot of consolidation actually in

499
00:26:59,680 --> 00:27:01,720
the in the REIT space because 
that's going to be one of the 

500
00:27:02,240 --> 00:27:05,120
few ways that that some of these
REITs can can create value and 

501
00:27:05,120 --> 00:27:08,080
increase cash flow per share is 
just to to merge, strip out the 

502
00:27:08,080 --> 00:27:11,600
GNA and move forward as a larger
enterprise. 

503
00:27:12,800 --> 00:27:16,200
I like it. 
I guess it that's likely why you

504
00:27:16,200 --> 00:27:18,760
see, like a lot of public REITs,
the argument is that their 

505
00:27:18,760 --> 00:27:21,360
balance sheet, at least when it 
comes to residential 

506
00:27:21,360 --> 00:27:23,840
multifamily, the argument is 
that their balance sheets are a 

507
00:27:23,840 --> 00:27:27,080
little too lazy. 
But that's probably a reflection

508
00:27:27,080 --> 00:27:29,520
of the fact that if you have to 
always issue equity, you may 

509
00:27:29,520 --> 00:27:33,240
want a lazy balance sheet. 
Yeah, that, that, that's fair. 

510
00:27:33,240 --> 00:27:38,040
I mean, if you look at the 
company's balance sheets today, 

511
00:27:38,320 --> 00:27:41,080
the Reed's balance sheets today 
relative to where they were 

512
00:27:41,560 --> 00:27:44,280
going into the the GFC, they're 
much better. 

513
00:27:44,280 --> 00:27:47,680
I think the average loan to 
value ratio or net debt to asset

514
00:27:47,680 --> 00:27:51,440
ratio is in the low 30s where it
was at the the mid 40s sort of 

515
00:27:51,560 --> 00:27:54,640
pre GFC. 
The debt to EBITDA ratios have 

516
00:27:54,640 --> 00:27:57,920
been reduced from you know, 
nearly seven times back then. 

517
00:27:58,080 --> 00:27:59,880
So it's sort of kind of five, 5 
1/2 Times Now. 

518
00:27:59,880 --> 00:28:03,520
So the, the, the balance sheets 
are in much better shape. 

519
00:28:03,520 --> 00:28:07,640
It's, it's just the set up for 
cash flows and dividends to 

520
00:28:07,640 --> 00:28:10,840
continue to increases is 
difficult for certain property 

521
00:28:10,840 --> 00:28:13,800
types. 
And it goes back to the top line

522
00:28:13,800 --> 00:28:16,800
kind of maybe being a little bit
more stagnant and also your 

523
00:28:16,800 --> 00:28:21,600
interest expense just resetting 
and increasing and that sort of 

524
00:28:21,600 --> 00:28:24,400
challenging that the ultimate 
free cash flow in the business. 

525
00:28:25,000 --> 00:28:28,000
Yeah. 
Do I recall correctly that you 

526
00:28:28,000 --> 00:28:30,120
own Prologis or is that not 
correct? 

527
00:28:30,520 --> 00:28:34,440
No, we do. 
In fact it is one of our larger 

528
00:28:34,800 --> 00:28:37,160
RE holdings. 
And I mean you probably know pro

529
00:28:37,160 --> 00:28:40,120
lodges pretty well. 
It's the largest owner of 

530
00:28:41,000 --> 00:28:43,880
industrial and and modern 
logistics assets. 

531
00:28:43,920 --> 00:28:48,600
You know globally they have a 
just incredible portfolio, I 

532
00:28:48,600 --> 00:28:53,080
think 1.4 billion square feet on
a on a pro rata basis globally 

533
00:28:53,080 --> 00:28:56,560
about 80% of it is in the US In 
addition to that, they have a 

534
00:28:56,560 --> 00:29:01,440
very sizable asset management 
business and they have a an 

535
00:29:01,440 --> 00:29:05,200
emerging sort of data data 
center opportunity which we can 

536
00:29:05,200 --> 00:29:09,760
we can talk more about. 
But PLD is in our view set up 

537
00:29:09,760 --> 00:29:12,160
much differently than than some 
of the other Reese in the sense 

538
00:29:12,160 --> 00:29:15,720
that we see significant top line
growth and they also have their 

539
00:29:15,720 --> 00:29:17,600
debt locked in at low cost for 
long term. 

540
00:29:17,600 --> 00:29:21,720
And so we expect them to 
continue to to drive the bottom 

541
00:29:21,720 --> 00:29:25,680
line so to so to speak. 
And in fact, if you look at PLD 

542
00:29:25,680 --> 00:29:31,520
today, their in place rents are 
about 40% below market rents. 

543
00:29:32,200 --> 00:29:35,360
And that's because unlike 
multifamily, which typically 

544
00:29:35,360 --> 00:29:39,560
rolls their leases every 1 1/2 
years, industrial real estate 

545
00:29:39,560 --> 00:29:42,280
companies are are typically 
rolling their leases, you know, 

546
00:29:42,280 --> 00:29:45,360
every four to five years. 
And given the significant 

547
00:29:45,360 --> 00:29:48,080
increase and demand that we've 
seen for industrial space sort 

548
00:29:48,080 --> 00:29:52,080
of post pandemic, PLD has yet to
capture all the embedded 

549
00:29:52,200 --> 00:29:54,200
reversion in their in their 
portfolio. 

550
00:29:54,920 --> 00:29:58,480
And so as they capture that, 
they're increasing their overall

551
00:29:58,480 --> 00:30:00,760
cash flows by about 8:00 to 9:00
percent a year. 

552
00:30:01,280 --> 00:30:04,480
And then their debt is also 
locked in for about 3% on an 

553
00:30:04,480 --> 00:30:06,120
average term of about nine 
years. 

554
00:30:06,240 --> 00:30:08,840
And so their interest expenses 
is, is pretty steady. 

555
00:30:08,840 --> 00:30:13,160
So that top line growth is 
turning into cash flow growth. 

556
00:30:13,600 --> 00:30:17,040
And the other thing that's 
really interesting with PLD is 

557
00:30:17,040 --> 00:30:20,880
they have this opportunity to 
continue to add solar to their 

558
00:30:20,880 --> 00:30:23,080
rooftops. 
They're the the second largest 

559
00:30:23,080 --> 00:30:27,240
owner now of on sites rooftop 
solar, which has become a decent

560
00:30:27,240 --> 00:30:32,120
sized business for them. 
But they're also evaluating data

561
00:30:32,120 --> 00:30:35,160
center opportunities throughout 
their portfolio and they're 

562
00:30:35,160 --> 00:30:37,600
dropping little heads here and 
there about it. 

563
00:30:37,600 --> 00:30:40,080
When their most recent 
conference call, they basically 

564
00:30:40,080 --> 00:30:45,320
outlined that they have up to 
four gigawatts of development 

565
00:30:45,320 --> 00:30:50,080
opportunities in the portfolio, 
and that is a a pipeline that is

566
00:30:50,240 --> 00:30:53,920
nearly the size of both Digital 
Realty and Equinix combined. 

567
00:30:54,320 --> 00:30:58,120
It's quite sizable. 
Now, 2 1/2 gigawatts of that is 

568
00:30:58,120 --> 00:31:01,320
actually sort of locked up. 
The power of the other 1 1/2, 

569
00:31:01,320 --> 00:31:02,960
they're going through the 
planning and application 

570
00:31:02,960 --> 00:31:07,600
process, which is difficult, but
PLD is also assembling a pretty 

571
00:31:07,600 --> 00:31:10,440
talented team of data center 
professionals. 

572
00:31:11,120 --> 00:31:13,880
And to the extent that they can 
unlock value in there, that 

573
00:31:13,880 --> 00:31:15,600
would be a, a, a big game 
changer. 

574
00:31:15,600 --> 00:31:18,840
So we are involved with PLD. 
We, we, we see opportunity in 

575
00:31:18,840 --> 00:31:21,000
that mark to market opportunity 
on the leases. 

576
00:31:21,000 --> 00:31:23,520
We think there's value in their 
low cost debt, but they're also 

577
00:31:23,520 --> 00:31:26,560
some ancillary opportunities 
that the data center one being 

578
00:31:26,560 --> 00:31:28,800
the most interesting in our view
on what could drive value kind 

579
00:31:28,800 --> 00:31:30,160
of over the next four to five 
years. 

580
00:31:31,440 --> 00:31:36,320
How do you think about the risk 
of capital chasing sort of both 

581
00:31:36,320 --> 00:31:39,760
those end markets and what that 
could do to economics? 

582
00:31:40,840 --> 00:31:44,600
Yeah, no, absolutely. 
I mean on the industrial real 

583
00:31:44,600 --> 00:31:49,160
estate side outside of self 
storage it it's probably the 

584
00:31:49,160 --> 00:31:54,400
easiest property type to build 
and you know lead times are are 

585
00:31:54,400 --> 00:31:57,280
usually only a year and a half 
to 2 1/2 years out. 

586
00:31:57,920 --> 00:32:00,720
And so you can see new supply 
come online and it changed the 

587
00:32:00,720 --> 00:32:03,280
economics in the market and 
that's what we have been 

588
00:32:03,280 --> 00:32:07,120
experiencing, You know, more 
recently in the industrial real 

589
00:32:07,120 --> 00:32:12,240
estate space, overall supply 
increase to about six, 6 1/2 

590
00:32:12,240 --> 00:32:15,120
percent of the national market. 
And, and, and so that that is 

591
00:32:16,000 --> 00:32:20,160
ultimately translated into 
higher vacancy rates for 

592
00:32:20,160 --> 00:32:23,840
industrial real estate relative 
to what we've seen kind of over 

593
00:32:23,840 --> 00:32:27,120
the past 10 years with the, you 
know, big demand driver of 

594
00:32:27,120 --> 00:32:29,560
e-commerce having a big impact 
on the market. 

595
00:32:29,560 --> 00:32:33,600
But when you look at the supply 
pipelines, they're moderating 

596
00:32:33,600 --> 00:32:36,480
very significantly going into 
2025. 

597
00:32:36,960 --> 00:32:39,960
And there are other demand 
drivers on the industrial real 

598
00:32:39,960 --> 00:32:42,360
estate side. 
I mean, not only does e-commerce

599
00:32:42,360 --> 00:32:46,040
continue to increase, but near 
shoring is driving demand. 

600
00:32:46,040 --> 00:32:48,760
And I know that is a blanket 
statement and a lot of that 

601
00:32:48,760 --> 00:32:51,760
demand hasn't materialized. 
But in terms of autos and and 

602
00:32:51,760 --> 00:32:55,440
pharmaceuticals and it is having
an impact in semiconductor as 

603
00:32:55,440 --> 00:32:57,240
well in certain markets like 
Phoenix. 

604
00:32:57,240 --> 00:33:00,680
And also with probably of all 
the uncertainty that we're going

605
00:33:00,680 --> 00:33:04,040
to going to face with the the 
new administration and what the 

606
00:33:04,040 --> 00:33:07,480
impact of tariffs are. 
We believe that the corporates 

607
00:33:07,480 --> 00:33:10,720
will continue to run their 
supply chains with a focus on 

608
00:33:10,720 --> 00:33:14,480
resiliency as opposed to 
strictly efficiency, which 

609
00:33:14,480 --> 00:33:17,080
should lead to to higher levels 
of, of inventory. 

610
00:33:17,840 --> 00:33:22,040
So those are all positive 
drivers for demand that should 

611
00:33:22,040 --> 00:33:24,800
continue to allow, I think 
industrial real estate owners to

612
00:33:24,800 --> 00:33:28,400
be in a, a favorable backdrop. 
And while people are have been 

613
00:33:28,400 --> 00:33:31,680
up in arms about the, the supply
levels, yeah, vacancy rates are 

614
00:33:31,720 --> 00:33:34,000
are still kind of only 6 1/2% 
nationally. 

615
00:33:34,600 --> 00:33:37,720
And historically that's a strong
market and it remains a pretty 

616
00:33:37,720 --> 00:33:39,360
strong market. 
They're just areas that are a 

617
00:33:39,360 --> 00:33:41,960
little bit more more challenged.
So that's something that we have

618
00:33:41,960 --> 00:33:44,960
to watch on the industrial side 
as well as the the self storage 

619
00:33:44,960 --> 00:33:46,600
side. 
And you were asking about it as 

620
00:33:46,880 --> 00:33:49,480
in regards to to data centers as
well, right? 

621
00:33:49,800 --> 00:33:51,960
Yeah, yeah. 
And I was just thinking like if 

622
00:33:51,960 --> 00:33:57,440
you own, by the time that you 
see the vacancy numbers tick up,

623
00:33:58,520 --> 00:34:01,000
seems like the stocks will sell 
off a little bit. 

624
00:34:01,000 --> 00:34:03,400
But I guess if you own it for 
the long term and you think that

625
00:34:03,400 --> 00:34:07,440
that you're owning it at a 
conservative appraisal of NAV, 

626
00:34:07,760 --> 00:34:09,960
that's just kind of part of 
owning real estate. 

627
00:34:10,600 --> 00:34:12,800
Yeah, that's very well said 
that. 

628
00:34:12,800 --> 00:34:16,880
And you're right, listed real 
estate tends to lead direct real

629
00:34:16,880 --> 00:34:18,920
estate. 
And in terms of valuations 

630
00:34:18,920 --> 00:34:23,040
resetting both on the downside 
is as well on the on the upside 

631
00:34:23,040 --> 00:34:27,120
usually listed real estate as a 
head of appraisals by call it 9 

632
00:34:27,120 --> 00:34:29,800
to 12 months. 
And and so to the extent that 

633
00:34:29,800 --> 00:34:33,800
fundamentals are slowing, if 
there is excess supply or more 

634
00:34:33,800 --> 00:34:36,639
limited demand, yeah, you'll see
the list of real estate stocks 

635
00:34:36,920 --> 00:34:41,520
correct pretty quickly, but they
often times overcorrect sort of 

636
00:34:41,520 --> 00:34:44,480
both ways. 
And PLDS stock price went 

637
00:34:44,480 --> 00:34:48,760
through a difficult period 
earlier this year on, on some of

638
00:34:48,760 --> 00:34:52,400
those concerns, we actually took
advantage of it and added to our

639
00:34:52,400 --> 00:34:55,159
position. 
I mean we are buying into PLD 

640
00:34:55,159 --> 00:34:59,240
earlier this year at at sort of 
a look through cap rate of about

641
00:34:59,360 --> 00:35:02,280
a 7 1/2% if you were to mark 
their, their leases to market 

642
00:35:02,880 --> 00:35:06,600
and also an applied price per 
square foot value of about 

643
00:35:06,600 --> 00:35:10,640
$150.00 a square foot, which is 
below replacement costs in our 

644
00:35:10,640 --> 00:35:12,920
view. 
If you look at some of the the 

645
00:35:12,920 --> 00:35:16,040
high barrier to entry markets 
which they're focused on, the 

646
00:35:16,040 --> 00:35:19,440
cost to build new product is 
probably 180 to $200 a foot. 

647
00:35:19,920 --> 00:35:22,640
So when you can buy really well 
located real estate at at high 

648
00:35:22,640 --> 00:35:25,160
yields and discounts for 
replacement cost, things tend to

649
00:35:25,160 --> 00:35:27,800
work out over time, provided 
there aren't secular changes 

650
00:35:28,400 --> 00:35:30,440
such as what you know we're 
seeing in office and what we've 

651
00:35:30,440 --> 00:35:34,360
seen in in retail. 
But we, we, we think much like 

652
00:35:34,400 --> 00:35:38,120
single family residential 
industrial is secularly favored 

653
00:35:38,560 --> 00:35:40,160
looking out over the next 5 to 
10 years. 

654
00:35:40,920 --> 00:35:45,320
Just from a business standpoint,
how do you compete with a 

655
00:35:45,320 --> 00:35:49,640
private firm? 
I mean, I saw, I saw what B Reed

656
00:35:49,640 --> 00:35:54,120
had something like a 3% drawdown
in 2022 and the publicly traded 

657
00:35:54,120 --> 00:35:56,760
ones had like 35. 
And I always found that to be 

658
00:35:56,760 --> 00:35:59,200
kind of interesting. 
I don't think that those numbers

659
00:35:59,200 --> 00:36:01,720
are exactly correct, but 
directionally they convey the, 

660
00:36:02,600 --> 00:36:06,280
you know, do those people that 
you talk to understand the 

661
00:36:06,280 --> 00:36:09,400
private equity is like 
volatility smoothing for lack of

662
00:36:09,400 --> 00:36:11,520
a better term. 
I said it's not you. 

663
00:36:13,640 --> 00:36:17,080
Yeah, there's been a lot written
about this a lot, a lot of focus

664
00:36:17,240 --> 00:36:19,880
on the space that the private 
read format. 

665
00:36:19,960 --> 00:36:25,080
In our view, there are 
advantages to focusing in on 

666
00:36:25,080 --> 00:36:27,880
unlisted real estate where we we
spend our time and they're also 

667
00:36:28,360 --> 00:36:31,120
disadvantages to focusing on 
unlisted real estate. 

668
00:36:31,120 --> 00:36:34,160
I mean we think some of the 
primary advantages to to being a

669
00:36:34,160 --> 00:36:37,000
real estate securities listed 
real estate is that you can buy 

670
00:36:37,000 --> 00:36:40,800
into some of the highest quality
real estate assets and 

671
00:36:40,800 --> 00:36:44,800
portfolios across the world. 
You can also align yourself with

672
00:36:44,800 --> 00:36:48,160
some of the most talented 
management teams globally that 

673
00:36:48,160 --> 00:36:52,280
are often well incentivized to 
create value for the entity. 

674
00:36:52,720 --> 00:36:56,000
In addition to that, publicly 
traded real estate companies 

675
00:36:56,080 --> 00:37:00,040
have competitive advantages in 
the sense that they have 

676
00:37:00,040 --> 00:37:03,000
multiple channels of capital to 
access. 

677
00:37:03,000 --> 00:37:07,080
They can issue new equity, they 
can issue JV equity. 

678
00:37:07,360 --> 00:37:10,520
Publicly traded companies can 
typically tap the unsecured bond

679
00:37:10,520 --> 00:37:13,960
markets which private reap's 
usually can't. 

680
00:37:14,240 --> 00:37:18,720
They can access mortgage debt. 
There are certainly a lot of 

681
00:37:18,720 --> 00:37:23,360
advantages to to be public that 
the primary drawback is that you

682
00:37:23,360 --> 00:37:26,760
have to deal with some of this 
volatility in the stock prices 

683
00:37:26,760 --> 00:37:30,200
that that you alluded to. 
But in our view that's actually 

684
00:37:30,200 --> 00:37:32,320
an advantage in the sense that 
you get these market 

685
00:37:32,320 --> 00:37:36,000
dislocations and you can buy 
into these irreplaceable 

686
00:37:36,280 --> 00:37:40,120
portfolios at huge discounts. 
Relative to what any private 

687
00:37:40,120 --> 00:37:42,400
buyer could ever buy that 
portfolio or that could that 

688
00:37:42,400 --> 00:37:45,880
company at and if you truly are 
long term and the company is 

689
00:37:45,880 --> 00:37:49,480
well capitalized, that security 
price is likely to rebound over 

690
00:37:49,480 --> 00:37:51,520
time. 
So if you're in it for five 

691
00:37:51,520 --> 00:37:53,920
years plus you're likely to do 
do pretty well. 

692
00:37:54,360 --> 00:37:56,400
So that that's why we like the 
listed space. 

693
00:37:56,400 --> 00:37:59,840
And if you look at listed real 
estate relative to direct real 

694
00:37:59,840 --> 00:38:03,480
estate, most studies will 
suggest that listed real estate 

695
00:38:03,800 --> 00:38:06,800
has historically outperformed. 
Another drawback though, to 

696
00:38:06,800 --> 00:38:09,000
listed real estate, and then 
it's something that you're, you 

697
00:38:09,000 --> 00:38:12,200
know, better off on the director
private side is that you don't 

698
00:38:12,200 --> 00:38:14,680
have to deal with the ups and 
downs, but you also have 

699
00:38:14,680 --> 00:38:18,920
control, right? 
You can make the decision on 

700
00:38:18,960 --> 00:38:21,480
whether you want to finance the 
asset, whether you will lease 

701
00:38:21,480 --> 00:38:23,280
the asset, whether you want to 
sell the asset. 

702
00:38:23,560 --> 00:38:26,720
Depending on who you are right, 
If you have the LP you don't 

703
00:38:26,720 --> 00:38:29,800
exactly make those decisions 
through the GPS. 

704
00:38:30,440 --> 00:38:32,040
No, you're right. 
If you're an investor in a 

705
00:38:32,040 --> 00:38:33,400
private REIT, that's not the 
case. 

706
00:38:33,400 --> 00:38:38,560
But if you're an owner of direct
real estate, you have that that 

707
00:38:38,560 --> 00:38:42,600
element of control. 
And actually going back, Marty 

708
00:38:42,600 --> 00:38:45,800
and Sam Zell were were good 
buddies because they work on 

709
00:38:45,800 --> 00:38:47,840
some things together. 
They used to have this debate at

710
00:38:47,840 --> 00:38:50,960
some of our conferences. 
Sam Zell was of the view that 

711
00:38:51,200 --> 00:38:54,760
publicly traded real estate 
should trade at a a premium to 

712
00:38:54,760 --> 00:38:58,200
the real estate value because of
the liquidity right there there.

713
00:38:58,200 --> 00:38:59,960
There's a value in being, being 
liquid. 

714
00:38:59,960 --> 00:39:02,480
And if you look at a lot of 
markets historically, they 

715
00:39:02,480 --> 00:39:06,400
probably have traded at NAV if 
not a slight premium. 

716
00:39:06,400 --> 00:39:10,160
And Marty was always of the view
that no, in fact, it, it should 

717
00:39:10,160 --> 00:39:14,440
trade at a slight discount, if 
not more of a more than a slight

718
00:39:14,440 --> 00:39:18,640
discount to NAV because you 
don't have control and also you 

719
00:39:18,640 --> 00:39:21,040
don't get some of the tax 
benefits that the direct real 

720
00:39:21,040 --> 00:39:23,960
estate owners get, right. 
I mean, if you're directly in 

721
00:39:23,960 --> 00:39:26,760
real estate, you're probably 
taking advantage of accelerated 

722
00:39:26,760 --> 00:39:30,840
depreciation as other items to 
boost your after tax cash flows.

723
00:39:31,440 --> 00:39:34,640
And often times when those are 
owned and reads for C corps, you

724
00:39:34,640 --> 00:39:36,120
might not get some of those 
benefits. 

725
00:39:36,160 --> 00:39:38,920
You certainly aren't going to 
get those benefits as an outside

726
00:39:38,920 --> 00:39:42,200
investor in in in the stock. 
So maybe the market sort of 

727
00:39:42,200 --> 00:39:44,440
agreed to meet the two guys in 
the middle and then trade around

728
00:39:44,440 --> 00:39:46,520
NAV. 
But yeah, they used to have that

729
00:39:46,520 --> 00:39:49,840
debate on terms of whether 
listed should trade at a premium

730
00:39:49,840 --> 00:39:51,040
or a discount. 
Yeah. 

731
00:39:51,040 --> 00:39:53,840
I guess the thing that's been 
popular over the last I guess 

732
00:39:53,840 --> 00:39:57,880
since 2020 is the idea of almost
like an illiquidity premium as 

733
00:39:57,880 --> 00:40:01,560
opposed to liquidity premium. 
And I guess so I've kind of 

734
00:40:01,560 --> 00:40:04,040
settled on this is it makes 
sense if you think about people 

735
00:40:04,040 --> 00:40:06,920
protecting their career just 
from like an incentive 

736
00:40:06,920 --> 00:40:09,880
standpoint. 
It's nice if you are allocated 

737
00:40:09,880 --> 00:40:12,280
to private and have to answer 
some questions. 

738
00:40:12,280 --> 00:40:14,440
It's nice to be able to have a 
mark that you can say, well, 

739
00:40:14,440 --> 00:40:17,160
somebody else did this, like 
it's not my mark, it's their 

740
00:40:17,160 --> 00:40:19,440
mark and my volatility isn't bad
and. 

741
00:40:19,760 --> 00:40:22,400
We're all doing it behaviorally.
It makes a lot of sense to me. 

742
00:40:22,400 --> 00:40:24,880
It makes a lot of sense too, 
from like a hurting perspective,

743
00:40:24,880 --> 00:40:28,040
which I guess it's just another 
way to say behaviorally, but 

744
00:40:28,040 --> 00:40:30,240
theoretically it doesn't make 
any sense to me. 

745
00:40:30,680 --> 00:40:32,200
But it's the way the world 
works. 

746
00:40:32,360 --> 00:40:35,240
You know, clip that ask misses, 
and certainly, you know, written

747
00:40:35,240 --> 00:40:38,920
about this to a great extent. 
And there's also a similar 

748
00:40:38,920 --> 00:40:41,960
mindset when it comes to 
investing in active versus 

749
00:40:41,960 --> 00:40:48,040
passive in the listed space. 
Morningstar wrote a study that 

750
00:40:48,040 --> 00:40:50,040
was published I believe earlier 
this year. 

751
00:40:50,480 --> 00:40:55,080
And they looked at all of the, 
the different sectors and how 

752
00:40:55,080 --> 00:40:59,000
those actively managed funds 
within the sector performed 

753
00:40:59,000 --> 00:41:01,160
relative to the the broader 
indices. 

754
00:41:01,160 --> 00:41:05,760
And real estate was the only 
sector and actually category 

755
00:41:06,160 --> 00:41:10,080
which had the active managers 
outperform the the passive funds

756
00:41:10,080 --> 00:41:16,560
over 35 and in in 10 years. 
And so there's statistical 

757
00:41:16,560 --> 00:41:21,440
evidence to support that you 
wouldn't want to be active in 

758
00:41:21,440 --> 00:41:24,600
the, in the real estate space, 
but that's hasn't shown through 

759
00:41:24,600 --> 00:41:27,160
in the fund flows. 
The fund flows continue to go to

760
00:41:27,800 --> 00:41:30,440
go to passive. 
And I, I think actually late 

761
00:41:30,440 --> 00:41:33,600
last year, earlier this year was
the first time that in the real 

762
00:41:33,600 --> 00:41:37,080
estate space there was actually 
more capital and passive 

763
00:41:37,680 --> 00:41:40,200
relative to active, which isn't,
you know, not dissimilar to what

764
00:41:40,200 --> 00:41:42,600
we're seeing just in the, in the
broader equity space. 

765
00:41:43,640 --> 00:41:48,600
But when we, when we stack up 
our portfolio relative to a, a 

766
00:41:48,600 --> 00:41:51,560
passive funnel, I'll just 
mention the V&Q that the 

767
00:41:51,560 --> 00:41:53,880
Vanguard real estate index, 
because they're the largest one.

768
00:41:54,520 --> 00:41:58,200
We think it is a superior 
alternative and proposition, 

769
00:41:58,200 --> 00:42:01,200
especially if you believe that 
real rates are going to going to

770
00:42:01,200 --> 00:42:02,520
stay positive. 
And some of those were 

771
00:42:02,520 --> 00:42:06,360
traditional REITs are going to 
be pressured as interest costs 

772
00:42:06,720 --> 00:42:08,720
reset. 
But I mean when when you look at

773
00:42:08,720 --> 00:42:13,080
our portfolio relative the the 
VNX, our portfolio on average 

774
00:42:13,080 --> 00:42:16,480
has a, a loan to value ratio or 
a net debt to asset ratio of 

775
00:42:16,480 --> 00:42:20,720
about 15%. 
The B&Q is about twice that at 

776
00:42:20,720 --> 00:42:25,200
about 3233%. 
The B&Q trades at more than two 

777
00:42:25,200 --> 00:42:27,680
times book, we're at about 1.2 
times book. 

778
00:42:28,480 --> 00:42:32,120
However, you know a lot of those
books are, are depreciated costs

779
00:42:32,120 --> 00:42:34,280
or to the except they're a 
service business, they're not 

780
00:42:34,280 --> 00:42:36,120
reflective of the underlying 
value. 

781
00:42:36,440 --> 00:42:39,720
You know, our portfolio trades 
at a 15% discount to our 

782
00:42:39,760 --> 00:42:43,200
estimates, probably more like a 
a low mid 20 discount to our 

783
00:42:43,200 --> 00:42:46,760
high case estimates of of NAB. 
Whereas if you were to look at 

784
00:42:46,760 --> 00:42:49,600
some of the sell side firms out 
there, they would tell you that 

785
00:42:49,600 --> 00:42:52,200
they're real, they're re 
universes trade at kind of 

786
00:42:52,200 --> 00:42:56,040
parity to NAB today. 
So we think the 3rd Ave. real 

787
00:42:56,040 --> 00:42:58,480
estate value fund is a better 
proposition. 

788
00:42:58,480 --> 00:43:02,680
And historically we've been able
to outperform our index over the

789
00:43:02,680 --> 00:43:04,120
long term, which is our our main
focus. 

790
00:43:04,120 --> 00:43:06,600
But a lot of investors just want
to go passive. 

791
00:43:06,600 --> 00:43:09,320
They're more focused on fees 
rather than net returns. 

792
00:43:09,320 --> 00:43:12,120
And we've seen that shift impact
the the real estate markets 

793
00:43:12,120 --> 00:43:14,040
pretty significantly over the 
past four to five years. 

794
00:43:14,840 --> 00:43:18,480
How institutionalized? 
Is Third Ave. like if I were to 

795
00:43:18,520 --> 00:43:22,600
buy your fund, how much am I 
betting on Ryan versus sort of 

796
00:43:22,600 --> 00:43:25,200
the firm. 
Well, we have a very. 

797
00:43:25,360 --> 00:43:29,440
Robust process that that the 
real estate team has has put in 

798
00:43:29,440 --> 00:43:31,640
place in in in practice over the
years. 

799
00:43:32,040 --> 00:43:34,880
I mentioned that I, you know, 
been at, at at 3rd Ave. since 

800
00:43:34,880 --> 00:43:40,560
2000 and, and six and coming out
of the first three to four years

801
00:43:40,560 --> 00:43:44,040
really coming out of the GFC, we
did pretty well during that that

802
00:43:44,040 --> 00:43:46,520
time period. 
But we we realized that we could

803
00:43:46,520 --> 00:43:51,400
have done even better. 
And I worked closely with my 

804
00:43:51,400 --> 00:43:53,480
long time business partner and 
the Co manager on the front, 

805
00:43:53,480 --> 00:43:58,200
Jason Wolff to, to put this more
robust and more repeatable 

806
00:43:58,200 --> 00:44:03,200
process around what was already 
a very unique real estate estate

807
00:44:03,200 --> 00:44:05,960
strategy. 
And as we have implemented that 

808
00:44:06,520 --> 00:44:10,800
and fine tune that, we, we think
that we've made this, this 

809
00:44:10,800 --> 00:44:15,080
strategy even more compelling 
and, and, and made the return 

810
00:44:15,120 --> 00:44:18,320
profile, especially relative to 
some of our peers and some of 

811
00:44:18,320 --> 00:44:21,600
the index funds more compelling.
And, and, and that shows up in 

812
00:44:21,600 --> 00:44:23,560
the numbers. 
If you were to look at our 

813
00:44:23,560 --> 00:44:25,680
funds, depending on the share 
class, we're going to be a four 

814
00:44:25,680 --> 00:44:29,480
or five star fund. 
Over the last 10 years, I 

815
00:44:29,480 --> 00:44:32,320
believe that Lipper has 
recognized either the mutual 

816
00:44:32,320 --> 00:44:34,840
fund or the use its fund as, as 
one of the best global real 

817
00:44:34,840 --> 00:44:36,680
estate funds in, in various 
categories. 

818
00:44:37,040 --> 00:44:39,440
And these are things that we 
weren't recognized for earlier 

819
00:44:39,440 --> 00:44:41,800
on. 
So we think by, you know, taking

820
00:44:41,800 --> 00:44:44,560
this unique strategy and putting
the robust and repeatable 

821
00:44:44,560 --> 00:44:48,720
process around it, we've made it
a more durable strategy and one 

822
00:44:48,720 --> 00:44:51,600
that can add even more value 
over the long term. 

823
00:44:51,880 --> 00:44:54,480
But no, we have, we have 4 
dedicated real estate 

824
00:44:54,480 --> 00:44:58,040
professionals at the strategy 
and we also have, you know, 10 

825
00:44:58,040 --> 00:44:59,840
investment professionals at, at 
3rd Ave. 

826
00:44:59,840 --> 00:45:03,360
We're very collaborative. 
We meet as an investment team 

827
00:45:03,400 --> 00:45:05,120
every Tuesday and, and Thursday 
morning. 

828
00:45:05,240 --> 00:45:07,960
That's something that we've done
at 3rd Ave. for, you know, 2 

829
00:45:07,960 --> 00:45:10,720
plus decades as a tradition 
that, that Marty kind of started

830
00:45:10,720 --> 00:45:13,600
and we, we've carried that on. 
But in addition to that, we meet

831
00:45:13,600 --> 00:45:15,040
separately as a real estate 
group. 

832
00:45:15,040 --> 00:45:18,480
So Jason and I are, are 
certainly key components of that

833
00:45:18,480 --> 00:45:20,400
the strategy. 
But we think that we built 

834
00:45:20,400 --> 00:45:23,720
something that is is sustainable
and and durable going forward 

835
00:45:23,720 --> 00:45:26,320
because of the the the process 
that we put in place. 

836
00:45:27,640 --> 00:45:29,120
That makes sense. 
I ask because the. 

837
00:45:29,120 --> 00:45:31,720
Extent that you traded a 
discount, maybe that would be a 

838
00:45:31,720 --> 00:45:34,200
reason, right, If there's like 
key man risk or something, but 

839
00:45:35,200 --> 00:45:38,960
apparently not, not to not. 
To talk down about. 

840
00:45:38,960 --> 00:45:42,120
Yourself, by the way, I mean, 
well, a, a, a. 

841
00:45:42,560 --> 00:45:46,440
A key point there in terms of 
the the discount in NAV that's 

842
00:45:46,440 --> 00:45:50,080
sort of the the look through 
discount on where our holdings 

843
00:45:50,080 --> 00:45:53,920
trade relative to what we think 
it's worth, not necessarily 

844
00:45:54,000 --> 00:45:57,200
where the fund trades. 
If this were a closed end fund, 

845
00:45:57,480 --> 00:45:59,920
you could often see that that 
discount, right. 

846
00:46:00,320 --> 00:46:03,960
But as an open end fund, it it 
trades in line with the the 

847
00:46:03,960 --> 00:46:05,760
daily in AV of the underlying 
holding. 

848
00:46:05,760 --> 00:46:08,640
But just in terms of the price 
to value proposition, what we 

849
00:46:08,640 --> 00:46:10,760
all we think that there's 
there's that disconnect there. 

850
00:46:10,760 --> 00:46:14,320
Yeah, yeah, I, I. 
Followed what you were saying, 

851
00:46:14,320 --> 00:46:17,560
but it's good to clarify that. 
Well, yeah, certainly I I. 

852
00:46:17,560 --> 00:46:21,200
Mentioned, we not only manage a 
a mutual fund, but we also have 

853
00:46:21,200 --> 00:46:24,320
a a usage fund, which is a 
mirror image of our mutual fund.

854
00:46:24,320 --> 00:46:28,040
It's just available for offshore
investors and you know, a lot of

855
00:46:28,040 --> 00:46:30,320
time when we're talking to 
investors and and other 

856
00:46:30,320 --> 00:46:34,560
geographies that that comes up 
and and they associate the 

857
00:46:34,560 --> 00:46:38,240
discount to NAB with the the the
discount to the underlying 

858
00:46:38,240 --> 00:46:40,760
holdings such as what you would 
see on a closed end fund. 

859
00:46:40,760 --> 00:46:44,840
So yeah, always good to clarify.
Yeah, indeed. 

860
00:46:45,160 --> 00:46:47,680
Do you want to talk a little bit
about residential real estate? 

861
00:46:47,960 --> 00:46:49,560
What are the big advantages that
we've? 

862
00:46:49,560 --> 00:46:52,320
Had at 3rd Ave. particularly on 
the real estate side is that we 

863
00:46:52,320 --> 00:46:55,880
have this flexible mandate that 
allows us to not only invest in 

864
00:46:55,920 --> 00:46:58,080
some of the real estate services
companies in the commercial real

865
00:46:58,080 --> 00:47:00,960
estate companies that we talked 
about, but also the vast amount 

866
00:47:00,960 --> 00:47:03,080
of opportunities on the on the 
residential side. 

867
00:47:03,080 --> 00:47:06,280
And we've always had a little 
bit of exposure on the 

868
00:47:06,280 --> 00:47:09,720
residential side, but we really 
started to increase that coming 

869
00:47:09,720 --> 00:47:13,120
out of the more challenging 
period, putting it gently, that 

870
00:47:13,120 --> 00:47:16,040
the residential markets went 
through in 2007, eight and nine.

871
00:47:16,040 --> 00:47:20,080
And for the better part of the 
last call it 7-8 years, we 

872
00:47:20,080 --> 00:47:24,240
probably had in between 30 to to
40% of our capital invested in 

873
00:47:24,640 --> 00:47:26,720
the residential space. 
And really throughout the value 

874
00:47:26,720 --> 00:47:31,080
chain, timber home builders, 
home improvement, title 

875
00:47:31,080 --> 00:47:34,760
insurance, really a, a 
diversified set of the 

876
00:47:34,760 --> 00:47:36,240
companies. 
I mean, they're targeted 

877
00:47:36,240 --> 00:47:37,840
investments. 
They're all really well 

878
00:47:37,840 --> 00:47:41,520
capitalized, really well 
managed, but largely positioned 

879
00:47:41,520 --> 00:47:44,360
to capitalize on the continued 
recovery in the residential 

880
00:47:44,360 --> 00:47:47,120
markets. 
And when you look at global real

881
00:47:47,120 --> 00:47:50,120
estate, there are very few 
places that have the supply 

882
00:47:50,120 --> 00:47:53,200
demand dynamics that the US 
residential markets have in 

883
00:47:53,200 --> 00:47:57,400
terms of us being basically at 
record low levels of supply was 

884
00:47:57,400 --> 00:48:02,560
often quoted or cited as a as a,
a number of months of supply, 

885
00:48:03,120 --> 00:48:05,120
but that's based upon 
transaction activities. 

886
00:48:05,120 --> 00:48:08,440
So when transaction activity is 
very low, the supply looks 

887
00:48:08,440 --> 00:48:10,560
higher. 
When transaction activity is 

888
00:48:10,560 --> 00:48:12,800
high that the supply might seem 
low, but it where it's really 

889
00:48:12,800 --> 00:48:14,120
not. 
We look at just overall 

890
00:48:14,120 --> 00:48:16,960
inventory levels. 
And if you look at national 

891
00:48:16,960 --> 00:48:20,080
vacancy rates, we're, we're 
basically at a a 4550 year low, 

892
00:48:20,080 --> 00:48:24,920
So very low levels of supply. 
At the same time, you have 

893
00:48:25,160 --> 00:48:31,200
record high levels of of demand.
And that's a result of basically

894
00:48:31,200 --> 00:48:35,000
millennials moving into their 
prime home buying years that 35 

895
00:48:35,000 --> 00:48:37,640
to kind of 49 year old age 
bracket. 

896
00:48:37,640 --> 00:48:40,480
The average homebuyer today is 
38 years now. 

897
00:48:40,480 --> 00:48:45,200
So as you continue to see growth
and in that age bracket as the 

898
00:48:45,200 --> 00:48:46,960
millennials move through there, 
you're, you're, you're going to 

899
00:48:46,960 --> 00:48:51,160
see more demand and that and 
that's really driving activity 

900
00:48:51,520 --> 00:48:53,720
in the single family space where
we have a, a lot of our 

901
00:48:53,720 --> 00:48:58,200
residential investments focused.
And actually, if you look at at 

902
00:48:58,200 --> 00:49:02,760
what's going on more recently, a
lot of homeowners are are 

903
00:49:02,760 --> 00:49:05,480
essentially locked into their 
existing homes because of of 

904
00:49:05,480 --> 00:49:08,760
mortgage rates, right? 
Yeah, well, choosing to stay 

905
00:49:08,760 --> 00:49:10,480
would be. 
How I would say it, but yes, 

906
00:49:10,880 --> 00:49:12,480
yeah, yeah, no, that's that that
is. 

907
00:49:12,480 --> 00:49:16,760
A better way to put it, but 
approximately you know, 75% of 

908
00:49:17,760 --> 00:49:20,480
homeowners that that have a 
mortgage have a have a rate of 4

909
00:49:20,480 --> 00:49:23,840
1/2 percent or or below and 
prevailing mortgage rates are in

910
00:49:23,840 --> 00:49:28,160
the 6 1/2 to 7% range. 
So if one wants to move the 

911
00:49:28,320 --> 00:49:31,600
monthly cost, it, it is likely 
to change pretty significantly 

912
00:49:31,600 --> 00:49:33,760
if they want to maintain the 
same level of accommodation. 

913
00:49:33,760 --> 00:49:38,720
So what we're seeing is existing
homeowners staying in place, but

914
00:49:38,720 --> 00:49:41,600
at the same time, the 
millennials continue to to enter

915
00:49:41,600 --> 00:49:44,120
the market and, and, and what 
single family homes. 

916
00:49:44,120 --> 00:49:47,680
And so the new home market is, 
is experiencing much different 

917
00:49:47,680 --> 00:49:49,320
fundamentals than the existing 
home market. 

918
00:49:50,000 --> 00:49:53,720
And what's going on in the, the 
new home market is that the, the

919
00:49:53,720 --> 00:49:56,240
large builders are are taking 
significant share. 

920
00:49:57,200 --> 00:50:01,000
They're using their balance 
sheets in their, in their scale 

921
00:50:01,560 --> 00:50:06,640
and their efficiencies to give 
up some margin to, to buy down 

922
00:50:06,640 --> 00:50:10,920
mortgages so that they can make 
it affordable for a, a, a new 

923
00:50:10,920 --> 00:50:13,800
home buyer. 
So if someone were to go look at

924
00:50:13,800 --> 00:50:17,640
ADR Horton or Lennar home today,
they may have an opportunity to 

925
00:50:17,640 --> 00:50:21,200
buy a home with a 5% mortgage 
rate instead of 6 1/2%. 

926
00:50:21,880 --> 00:50:27,760
And it costs the home builder 
probably 250 to to 400 basis 

927
00:50:27,760 --> 00:50:30,320
points of margin and apply that 
down usually for the the life of

928
00:50:30,320 --> 00:50:33,120
the loan. 
And as a result of that, you've 

929
00:50:33,120 --> 00:50:36,440
seen the large builders take 
significant share, something 

930
00:50:36,440 --> 00:50:40,280
that the smaller and regional 
builders really can't offer it. 

931
00:50:40,280 --> 00:50:44,600
It's pretty amazing pre GFC that
the large builders accounted for

932
00:50:44,600 --> 00:50:50,200
about 25% of new home sales and 
they're basically on on pace to 

933
00:50:50,200 --> 00:50:52,640
be 50 to 55% at the end of the 
year. 

934
00:50:53,080 --> 00:50:55,400
So that the large public 
builders have taken, you know, 

935
00:50:55,400 --> 00:50:58,200
significant share or so. 
And and because of those 

936
00:50:58,200 --> 00:51:00,840
incentives, they've they've 
continue to deliver new homes. 

937
00:51:01,360 --> 00:51:05,520
And Lennar, it is really you 
know with Dr. Horton the the 

938
00:51:05,520 --> 00:51:08,200
leading player in the in the 
whole building space today. 

939
00:51:08,200 --> 00:51:12,600
Those two alone account for 
about 25% national market share.

940
00:51:13,000 --> 00:51:15,320
I mean pretty amazing to think 
those two companies account for 

941
00:51:15,560 --> 00:51:17,880
basically one out of every four 
new home sales. 

942
00:51:18,440 --> 00:51:22,600
Yeah, it is wild in in the 
country, but they have certainly

943
00:51:22,600 --> 00:51:26,200
taken advantage of their scale 
to lock up land, to lock in 

944
00:51:26,200 --> 00:51:29,120
labor, to get efficiencies on 
materials and as a result 

945
00:51:29,120 --> 00:51:31,160
they're able to deliver 
affordable homes. 

946
00:51:31,600 --> 00:51:34,200
And and we're actually, we, 
we've really been focused in on 

947
00:51:34,200 --> 00:51:38,280
the Lennar B shares relative to 
the A shares, which we think are

948
00:51:38,920 --> 00:51:40,920
a, A, a pretty interesting 
security. 

949
00:51:41,400 --> 00:51:44,280
The B shares have historically 
traded at a discount to the A 

950
00:51:44,480 --> 00:51:47,200
shares. 
And historically that was the 

951
00:51:47,200 --> 00:51:49,280
case because the, the liquidity 
wasn't there. 

952
00:51:49,280 --> 00:51:52,840
But Lennar bought Cal Atlantic 
back in 2017. 

953
00:51:52,840 --> 00:51:56,800
I think the deal closed in 18 
and they issued new shares, 

954
00:51:56,800 --> 00:51:58,120
including B shares as a part of 
that. 

955
00:51:58,120 --> 00:52:00,640
And the trading activity really,
really picked up. 

956
00:52:00,640 --> 00:52:05,840
And the B shares, which once 
traded at a maybe a 1516% 

957
00:52:05,840 --> 00:52:08,920
discount to the A shares, now 
trades that had maybe a six to 

958
00:52:08,920 --> 00:52:11,920
7% discount. 
But what, what's really 

959
00:52:11,920 --> 00:52:14,640
interesting about Lennar is that
it's, it's more than just a best

960
00:52:14,640 --> 00:52:18,160
in class home builder. 
They're scheduled or they're, 

961
00:52:18,160 --> 00:52:21,200
they're expected to spin out a, 
a, a land development business 

962
00:52:21,680 --> 00:52:23,840
soon. 
They've kind of guided that that

963
00:52:23,840 --> 00:52:28,040
would be in the range of 6 to $8
billion of, of book value. 

964
00:52:28,040 --> 00:52:31,440
And they also have some other 
investments in a single family 

965
00:52:31,440 --> 00:52:33,080
rental platform. 
They still have some multi 

966
00:52:33,080 --> 00:52:35,280
family investments left, some 
prop tech investments. 

967
00:52:35,560 --> 00:52:37,720
If you add them all up, it's 
about $40 a share. 

968
00:52:37,880 --> 00:52:42,960
I think the Lenore B shares 
trade about maybe 16165 today. 

969
00:52:43,360 --> 00:52:47,760
So you strip that out, that's 
kind of implying 120 to $125.00 

970
00:52:47,760 --> 00:52:50,720
a share for the the whole 
building business and they do 

971
00:52:50,720 --> 00:52:53,280
about $15 a share in, in, in 
earnings. 

972
00:52:53,960 --> 00:52:56,800
So you're kind of backing into 
this best in class builder at 

973
00:52:56,800 --> 00:52:58,200
around kind of eight times 
earnings. 

974
00:52:58,200 --> 00:53:01,480
But what what they've done over 
the last six to seven years is 

975
00:53:01,480 --> 00:53:04,200
transition the home building 
business to one that that really

976
00:53:04,200 --> 00:53:07,600
looks more like NVRNVR has 
historically been the one 

977
00:53:07,600 --> 00:53:10,320
builder that hasn't owned a lot 
of land. 

978
00:53:10,320 --> 00:53:14,080
They've always used options it 
it limits the amount of capital 

979
00:53:14,080 --> 00:53:15,680
that they have invested in the 
business. 

980
00:53:15,680 --> 00:53:19,160
They also have significant scale
in the markets where they focus.

981
00:53:19,160 --> 00:53:22,480
NV Rs historically dominated the
Mid-Atlantic and now through 

982
00:53:22,480 --> 00:53:25,320
some of these acquisitions that 
Lennar's made, they have similar

983
00:53:25,320 --> 00:53:29,400
scale in in other markets. 
And NV Rs also been historically

984
00:53:29,400 --> 00:53:32,120
a net cash home builder. 
And and that's one thing that's 

985
00:53:32,120 --> 00:53:34,000
really changed with the home 
builders over the last five to 

986
00:53:34,000 --> 00:53:36,560
six years is most of them have 
paid down debt, Lennar's 

987
00:53:36,560 --> 00:53:40,440
actually net cash. 
And so once they effectuate the 

988
00:53:40,440 --> 00:53:42,280
spin, you're going to have a net
cash filter. 

989
00:53:42,280 --> 00:53:45,040
They're going to be land light 
real market leader. 

990
00:53:45,040 --> 00:53:49,200
We we think that they could 
trade more like NVRNVR is 

991
00:53:49,200 --> 00:53:51,320
historically traded around 15 
times earnings. 

992
00:53:52,200 --> 00:53:56,600
And so if Lenore re rates as 
that's been happens in our view,

993
00:53:56,600 --> 00:54:00,200
there's significant value to be 
be recognized, right A 15 

994
00:54:00,200 --> 00:54:04,960
multiple on 15 times. 
SO15A share is few 25 + 40 

995
00:54:04,960 --> 00:54:06,680
dollars a share for some of 
those other things you're at 

996
00:54:06,680 --> 00:54:08,680
265. 
And the last thing I would say 

997
00:54:08,680 --> 00:54:11,400
on the Leonard B shares and this
isn't something that we we 

998
00:54:11,400 --> 00:54:14,160
underwrite to, but it's 
certainly free option value for 

999
00:54:14,360 --> 00:54:17,880
for B shareholders. 
And historically what we've 

1000
00:54:17,880 --> 00:54:22,840
witnessed is when B shares 
convert into A shares and they 

1001
00:54:22,840 --> 00:54:25,720
have super majority voting 
rights which these Leonard B 

1002
00:54:25,720 --> 00:54:30,400
shares do they, they tend to get
a about a, a 30% premium, 

1003
00:54:31,080 --> 00:54:35,040
meaning that they'll exchange at
at at into 1.3 A shares. 

1004
00:54:35,040 --> 00:54:39,360
We've seen it at for a city, 
we've seen it at Magna more 

1005
00:54:39,360 --> 00:54:42,240
recently with tech resources, 
Constellation brands, etcetera. 

1006
00:54:42,800 --> 00:54:46,960
So with Lennar B shares trading 
here at 160 take a reasonable 

1007
00:54:47,480 --> 00:54:50,480
value kind of in the in the mid 
2 hundreds and then potentially 

1008
00:54:50,880 --> 00:54:53,360
ending up with 1.3 air shares 
down the road. 

1009
00:54:53,800 --> 00:54:55,040
It's a pretty interesting 
security. 

1010
00:54:55,040 --> 00:54:58,000
It's been one of our our top 
holdings for a a number of years

1011
00:54:58,000 --> 00:54:59,280
and it remains that the case 
today. 

1012
00:54:59,280 --> 00:55:02,240
But that's one of the the larger
positions that we have in the 

1013
00:55:02,240 --> 00:55:06,280
residential space right now. 
That is interesting, the home 

1014
00:55:06,280 --> 00:55:07,640
builders. 
Are something I completely 

1015
00:55:07,640 --> 00:55:14,120
missed, which was real fun, but 
I I I knew for sure no I well 

1016
00:55:14,120 --> 00:55:18,600
that I know, but I I knew I well
knew I suspected highly that 

1017
00:55:18,600 --> 00:55:19,920
people weren't going to be 
moving. 

1018
00:55:20,000 --> 00:55:24,720
I didn't know the rest of the I 
failed to see how the big home 

1019
00:55:24,720 --> 00:55:26,960
builders would be buying down 
mortgage rates. 

1020
00:55:26,960 --> 00:55:31,000
But I think if if rates aren't 
going down, continues to be a 

1021
00:55:31,000 --> 00:55:33,440
tailwind, right? 
Yeah, if you go. 

1022
00:55:33,440 --> 00:55:35,920
Way back, it was actually an 
incentive that was used in the 

1023
00:55:35,920 --> 00:55:40,000
late 70s and early 80s when 
mortgage rates were an issue on 

1024
00:55:40,000 --> 00:55:43,720
some of these builders. 
Back then US Home, what was was 

1025
00:55:43,720 --> 00:55:45,880
the dominant player. 
US Home was actually acquired by

1026
00:55:45,880 --> 00:55:49,040
Lennar in the in the late 90s. 
But some of these tools have 

1027
00:55:49,040 --> 00:55:52,320
been used before, but with the 
regional banks sort of being 

1028
00:55:52,320 --> 00:55:54,800
under pressure in terms of 
lending, especially the land 

1029
00:55:55,920 --> 00:55:58,920
acquisition and, and 
development, that's created an 

1030
00:55:58,920 --> 00:56:01,440
opportunity for private equity 
capital to, to step in and 

1031
00:56:01,440 --> 00:56:03,400
basically the big builders to 
team up with them. 

1032
00:56:04,120 --> 00:56:06,120
And then so the industry 
dynamics have have changed. 

1033
00:56:06,120 --> 00:56:10,040
But I know that you've talked 
about multi family with some of 

1034
00:56:10,040 --> 00:56:11,680
your, your previous guests at 
great length. 

1035
00:56:12,240 --> 00:56:14,840
And one of the things that that 
we've been focused on, we like 

1036
00:56:14,840 --> 00:56:16,520
multi family. 
I mean, it's a terrific asset 

1037
00:56:16,520 --> 00:56:19,080
class, right? 
And you typically rents track 

1038
00:56:19,080 --> 00:56:20,880
wages and you can get positive 
leverage. 

1039
00:56:20,880 --> 00:56:24,880
They have a, you know, borrowing
advantage through the GS ES and 

1040
00:56:24,920 --> 00:56:26,800
you know, it's been under a 
little bit of pressure more 

1041
00:56:26,800 --> 00:56:29,440
recently with supply, but still 
a great place to be in in real 

1042
00:56:29,440 --> 00:56:31,680
estate. 
The the, the only item we would 

1043
00:56:31,680 --> 00:56:35,200
add is that if you look at 
demographics for the rest of the

1044
00:56:35,200 --> 00:56:41,040
decade, that that sort of 20 to 
34 year old cohort, it's 

1045
00:56:41,040 --> 00:56:44,680
actually going to start to 
decline next year and, and do so

1046
00:56:44,680 --> 00:56:47,040
for the rest of the decade. 
And I know that that's not the 

1047
00:56:47,040 --> 00:56:50,240
only people that they utilize 
multi family, but you know, the 

1048
00:56:50,240 --> 00:56:53,880
millennial cohort as they went 
through that, that age bracket 

1049
00:56:54,040 --> 00:56:58,000
20 to 34, it provided tremendous
demand tailwinds on the 

1050
00:56:58,000 --> 00:57:00,320
multifamily side. 
And that's what we experienced 

1051
00:57:00,560 --> 00:57:04,320
from kind of 2011 basically 
through the pandemic. 

1052
00:57:04,320 --> 00:57:09,560
But now that larger cohort is in
our view favoring you know the 

1053
00:57:09,560 --> 00:57:12,520
single family format moving to 
the suburbs and and that will 

1054
00:57:12,520 --> 00:57:15,520
continue to be tailwinds for the
single family residential 

1055
00:57:15,520 --> 00:57:19,120
markets where senior living. 
Well, senior living there, 

1056
00:57:19,120 --> 00:57:21,160
there's. 
Certainly a lot of tailwinds 

1057
00:57:21,160 --> 00:57:23,280
there in terms of growth just in
that that cohort. 

1058
00:57:23,280 --> 00:57:27,800
But you know, one of the items 
that that is increasingly 

1059
00:57:27,800 --> 00:57:31,600
evident is that people are just 
staying in their homes longer 

1060
00:57:31,600 --> 00:57:35,320
than they used to. 
And there are a lot more, I 

1061
00:57:35,320 --> 00:57:40,520
guess, reliable home care 
options and because of mortgage 

1062
00:57:40,520 --> 00:57:42,640
rates also some people just 
don't want to leave their homes.

1063
00:57:42,640 --> 00:57:45,720
So that's another part of the 
equation in terms of the 

1064
00:57:45,720 --> 00:57:47,960
depressed levels of existing 
homes. 

1065
00:57:47,960 --> 00:57:51,360
It's that a lot of people are 
just staying a place longer, not

1066
00:57:51,360 --> 00:57:53,520
to mention what's going on in 
the in the brokerage market, 

1067
00:57:53,520 --> 00:57:55,200
right? 
I mean that that business has 

1068
00:57:55,200 --> 00:57:58,320
been turned upside down just in 
terms of how commissions were 

1069
00:57:59,000 --> 00:58:02,360
and uncertainty on where you can
advertise buyers commissions 

1070
00:58:02,360 --> 00:58:05,320
where you can't do it. 
There's certainly probably some 

1071
00:58:05,320 --> 00:58:07,040
opportunities that come out of 
that. 

1072
00:58:07,480 --> 00:58:12,280
The US historically the models 
then basically 6% of total sales

1073
00:58:12,280 --> 00:58:15,040
price get split up 5050 between 
the brokers. 

1074
00:58:15,800 --> 00:58:18,920
And when you look at what 6% as 
a percentage of a lot of 

1075
00:58:18,920 --> 00:58:22,200
people's equity, if they have a 
a mortgage on on it, that's a 

1076
00:58:22,200 --> 00:58:24,360
disproportionate share of their 
investment. 

1077
00:58:24,360 --> 00:58:26,360
I mean most markets 
internationally are kind of in 

1078
00:58:26,360 --> 00:58:29,640
the one 1 1/2 percent range. 
So we would expect to see some 

1079
00:58:29,640 --> 00:58:32,640
more pressure, which should you 
know generally be be good 

1080
00:58:32,640 --> 00:58:34,960
because the 6% Commission is AI 
mean. 

1081
00:58:35,200 --> 00:58:37,920
It's ridiculous, is what it is. 
Yeah. 

1082
00:58:37,960 --> 00:58:40,680
Thank you for saying that. 
Yeah, that's insane, especially.

1083
00:58:40,680 --> 00:58:42,800
Given the skill set of most 
people that take it. 

1084
00:58:42,800 --> 00:58:45,400
But anyway that's again me 
saying it, not you. 

1085
00:58:46,040 --> 00:58:47,800
Another thing that that's 
changing. 

1086
00:58:48,320 --> 00:58:50,280
And something that we're 
watching and we're also very, 

1087
00:58:50,280 --> 00:58:53,000
very heavily involved with as it
relates to the residential 

1088
00:58:53,000 --> 00:58:55,840
markets is what is going on with
the GS ES, right? 

1089
00:58:55,840 --> 00:58:58,360
What what's going on with Fannie
Mae and Freddie Mac. 

1090
00:58:58,360 --> 00:59:01,720
And I know that you've talked 
about it with guests and in the 

1091
00:59:01,720 --> 00:59:03,400
past and I have I'm sure most of
her. 

1092
00:59:03,400 --> 00:59:04,880
I think just Bruce, I don't 
think we've. 

1093
00:59:04,880 --> 00:59:08,080
Talked much Freddie and Fannie 
I, I was curious because you've 

1094
00:59:08,080 --> 00:59:11,320
had a a holding in it for a 
while and I wanted to ask you 

1095
00:59:11,920 --> 00:59:17,200
from a portfolio standpoint, how
did you think about holding I I 

1096
00:59:17,200 --> 00:59:18,600
don't want to deem. 
It speculative. 

1097
00:59:18,600 --> 00:59:22,280
Because the price you paid would
probably argue that it was not 

1098
00:59:22,280 --> 00:59:25,640
speculative, but the timing in 
which you would realize the 

1099
00:59:25,640 --> 00:59:29,320
ultimate outcome I think is like
almost certainly speculative. 

1100
00:59:29,720 --> 00:59:31,880
So how did you think about 
sizing that and running a 

1101
00:59:31,880 --> 00:59:37,160
portfolio with such an uncertain
out timing outcome before I get 

1102
00:59:37,160 --> 00:59:38,520
into? 
That that portion of it. 

1103
00:59:38,520 --> 00:59:41,160
Let me just give a, a quick 
update on, on where they are 

1104
00:59:41,160 --> 00:59:44,040
because a lot of these facts and
in our opinion get overlooked 

1105
00:59:44,040 --> 00:59:47,640
and, and are certainly not 
reported in, in major financial 

1106
00:59:47,640 --> 00:59:50,840
publications. 
As you and I, I, I would imagine

1107
00:59:50,840 --> 00:59:55,240
most of your viewers know Fannie
and, and and Freddie are mission

1108
00:59:55,640 --> 00:59:57,960
critical entities when it, when 
it comes to the residential 

1109
00:59:58,360 --> 01:00:01,880
mortgage markets. 
They were pushed into 

1110
01:00:01,880 --> 01:00:05,000
conservatorship and in late 
2008. 

1111
01:00:05,720 --> 01:00:09,640
Ultimately, they were forced to 
take accounting losses based 

1112
01:00:09,640 --> 01:00:14,280
upon anticipated provisions or 
or anticipated losses that they 

1113
01:00:14,280 --> 01:00:17,480
would take on the mortgage book.
Because of that, they had to 

1114
01:00:17,480 --> 01:00:21,400
draw down on the the senior 
basically preferred credit 

1115
01:00:21,400 --> 01:00:24,960
facility that was provided by 
the Treasury. 

1116
01:00:25,760 --> 01:00:31,440
However, as conditions involved 
in the residential markets began

1117
01:00:31,440 --> 01:00:35,520
to stabilize and then ultimately
rebound, those losses were were 

1118
01:00:35,520 --> 01:00:38,480
reversed. 
However, the capital was never 

1119
01:00:38,480 --> 01:00:41,800
really returned to to Fannie and
and and Freddie because of a a 

1120
01:00:41,800 --> 01:00:45,680
controversial change that took 
place in 2012. 

1121
01:00:45,960 --> 01:00:48,280
What is now deemed the 3rd 
Amendment or that the net worth 

1122
01:00:48,280 --> 01:00:51,560
sweep. 
And basically there was a change

1123
01:00:51,560 --> 01:00:56,200
made prior to those accounting 
changes being reversed where the

1124
01:00:56,200 --> 01:00:59,600
Treasury, which had previously 
charged about 10% annually for 

1125
01:00:59,600 --> 01:01:02,680
that the credit facilities 
provided, would now receive all 

1126
01:01:02,680 --> 01:01:05,480
of the, the, the GS ES future, 
future profits. 

1127
01:01:06,280 --> 01:01:09,120
And lo and behold, right after 
that change was made, the 

1128
01:01:09,120 --> 01:01:10,320
accounting changes were 
reversed. 

1129
01:01:10,320 --> 01:01:12,960
And they've gone on to generate 
significant profits. 

1130
01:01:12,960 --> 01:01:15,120
And there were multiple lawsuits
related to that. 

1131
01:01:15,120 --> 01:01:18,360
They were tied up in, in various
lawsuits and in, in courts for 

1132
01:01:18,360 --> 01:01:21,400
many years. 
But a lot of this actually 

1133
01:01:21,400 --> 01:01:26,720
started to to settle in kind of 
in the the 2019-2020 time frame.

1134
01:01:27,200 --> 01:01:32,000
And one of the major changes 
that that took place was under 

1135
01:01:32,200 --> 01:01:35,920
the Trump administration when 
Mnuchin came in as as Treasury 

1136
01:01:35,920 --> 01:01:38,800
Secretary. 
And ultimately when they were 

1137
01:01:38,800 --> 01:01:41,680
able to appoint their head to 
the FHFA, Mark Calabria. 

1138
01:01:42,560 --> 01:01:46,480
And they they reversed that that
net or sweep and began to allow 

1139
01:01:46,480 --> 01:01:50,080
Fannie and Freddie to retain a 
certain amount of capital, 

1140
01:01:50,080 --> 01:01:51,920
ultimately retain all of their 
capital. 

1141
01:01:52,400 --> 01:01:56,200
And because of the reforms that 
Fannie and Freddie have taken 

1142
01:01:56,200 --> 01:01:58,760
since they were placed in the 
conservatorship and some of the 

1143
01:01:58,760 --> 01:02:01,560
other changes that have taken 
place with their business model 

1144
01:02:01,560 --> 01:02:07,800
over the past 1415 years, people
in, in our view don't appreciate

1145
01:02:07,880 --> 01:02:11,560
how much that business is 
involved and how profitable they

1146
01:02:11,560 --> 01:02:12,960
they've become. 
I mean, just to put it in 

1147
01:02:12,960 --> 01:02:16,960
perspective, they've reduced 
their mortgage portfolios by 

1148
01:02:17,440 --> 01:02:20,960
more than 90% since they were 
placed into conservatorship. 

1149
01:02:22,120 --> 01:02:25,960
And they've also increased their
profitability to a point where 

1150
01:02:25,960 --> 01:02:28,720
Fannie and Freddie are now 
making about $36 billion 

1151
01:02:28,720 --> 01:02:31,160
annually on a pre tax basis. 
I mean, these are some of the 

1152
01:02:31,160 --> 01:02:34,160
most profitable companies out 
there, especially in the in the 

1153
01:02:34,160 --> 01:02:37,160
real estate space. 
And even since they were just 

1154
01:02:37,640 --> 01:02:40,080
allowed to start retaining 
capital kind of in that 

1155
01:02:40,080 --> 01:02:45,120
2019-2020 time frame, they've 
already retained about $150 

1156
01:02:45,120 --> 01:02:47,800
billion of capital, which is 
more than they've ever had. 

1157
01:02:48,040 --> 01:02:52,040
So these these businesses have 
really been been transformed and

1158
01:02:52,040 --> 01:02:54,560
there were, you know, serious 
efforts to get them out of 

1159
01:02:54,560 --> 01:02:57,400
conservatorship under the Trump 
administration. 

1160
01:02:58,400 --> 01:03:00,440
Those were probably the most 
well documented through Mark 

1161
01:03:00,440 --> 01:03:02,600
Calabria's book Shelter in the 
Storm. 

1162
01:03:02,600 --> 01:03:04,680
If you haven't read that, it 
provides some good background 

1163
01:03:04,680 --> 01:03:08,360
on, on where things back went. 
But it it seems like the process

1164
01:03:08,360 --> 01:03:11,280
was sort of set aside during 
the, the, the Biden 

1165
01:03:11,280 --> 01:03:13,120
administration. 
But coming back to your 

1166
01:03:13,120 --> 01:03:16,120
question, how do we think about,
you know, sizing it and thinking

1167
01:03:16,120 --> 01:03:19,400
about how this could evolve? 
Our view was we weren't involved

1168
01:03:19,400 --> 01:03:23,440
with it prior to the point where
the companies can retain 

1169
01:03:23,440 --> 01:03:25,800
capital. 
Again, we were very actually 

1170
01:03:25,800 --> 01:03:28,680
close to investing in the 
entities prior to that network 

1171
01:03:28,680 --> 01:03:30,920
suite because we were tracking 
them. 

1172
01:03:31,280 --> 01:03:34,320
We, we, we could see the 
profitability coming, but then 

1173
01:03:34,320 --> 01:03:37,000
the network sweep happened. 
And so we also kind of put it 

1174
01:03:37,000 --> 01:03:38,520
aside. 
But when they were allowed to 

1175
01:03:38,520 --> 01:03:41,120
retain capital, we, we thought 
that it was tracking to the 

1176
01:03:41,120 --> 01:03:43,680
point where it would exit 
conservatorship. 

1177
01:03:44,000 --> 01:03:47,160
And we still believe that to, to
be the case of the the warrants 

1178
01:03:47,160 --> 01:03:51,320
that the Treasury received as a 
part of the financing package 

1179
01:03:51,760 --> 01:03:54,120
that the company put in place 
when they wanted a 

1180
01:03:54,120 --> 01:03:56,920
conservatorship, not only 
included that that senior 

1181
01:03:56,920 --> 01:04:00,680
preferred facility, but also 
warrants to purchase, you know, 

1182
01:04:00,680 --> 01:04:02,880
80% of the common stock of the 
two entities. 

1183
01:04:03,320 --> 01:04:07,160
And, and those warrants actually
expired in 2000 and, and 28. 

1184
01:04:07,920 --> 01:04:12,560
And so we always thought that 
that was sort of a, a reasonable

1185
01:04:12,560 --> 01:04:16,680
expectation on when they could 
ultimately exit. 

1186
01:04:16,680 --> 01:04:20,800
And we were buying the preferred
securities at sort of 10 to 

1187
01:04:20,800 --> 01:04:24,840
$0.15 on the dollar. 
So in our view, even if it took 

1188
01:04:25,480 --> 01:04:29,600
six, 7-8 years to get out, we, 
we didn't really envision a 

1189
01:04:29,600 --> 01:04:34,880
scenario where the preferreds 
would be sort of wiped out, so 

1190
01:04:34,880 --> 01:04:37,480
to speak, given how profitable 
they were and how quickly the 

1191
01:04:37,480 --> 01:04:40,560
companies were, were, were, 
were, were building capital. 

1192
01:04:40,880 --> 01:04:45,680
And our estimate would actually 
only be enhanced to the extent 

1193
01:04:45,680 --> 01:04:50,240
that there were once again plans
to sort of raise additional 

1194
01:04:50,240 --> 01:04:53,440
capital and get them out of 
conservatorship via recap and 

1195
01:04:53,680 --> 01:04:57,920
and release, which under a new 
Trump administration is more 

1196
01:04:57,920 --> 01:05:00,840
likely to come about rather than
less likely given that they were

1197
01:05:00,840 --> 01:05:03,920
already working on it back in 
20, but kind of got cut short. 

1198
01:05:03,920 --> 01:05:06,840
Give it some of the delays with 
the pandemic and obviously with 

1199
01:05:06,840 --> 01:05:10,160
him not getting an immediate 
second term, let's say if they 

1200
01:05:10,160 --> 01:05:12,240
get. 
Released from conservatorship, 

1201
01:05:12,360 --> 01:05:15,000
are they still going to be 
government, like basically 

1202
01:05:15,000 --> 01:05:17,760
government sponsored or 
guaranteed or whatever? 

1203
01:05:17,760 --> 01:05:22,040
Or do you think they'll be like 
fully private and not sort of 

1204
01:05:22,040 --> 01:05:26,680
these quasi governmental 
entities in our view? 

1205
01:05:26,680 --> 01:05:30,720
They will probably remain as as 
as government sponsored entities

1206
01:05:31,280 --> 01:05:34,920
with a charter to conduct 
business not totally dissimilar 

1207
01:05:35,480 --> 01:05:37,200
from from from the banking 
business. 

1208
01:05:38,160 --> 01:05:44,640
And that these entities will pay
some sort of fee for a a credit 

1209
01:05:44,640 --> 01:05:48,240
facility that will remain in 
place and provide capital to 

1210
01:05:48,240 --> 01:05:50,120
these entities to the extent 
that they would need it. 

1211
01:05:50,680 --> 01:05:53,240
So you know, maybe they wrong 
revolver fee or something. 

1212
01:05:54,320 --> 01:05:55,800
That, absolutely. 
Right. 

1213
01:05:55,800 --> 01:06:00,720
Just like banks will pay fees 
based upon their assets or their

1214
01:06:00,720 --> 01:06:03,960
their deposits, the GS, ES are 
likely to to pay something 

1215
01:06:03,960 --> 01:06:07,000
similar kind of eight to 10 
basis points relative to the 

1216
01:06:07,000 --> 01:06:09,280
amount of capital that's 
provided to them. 

1217
01:06:09,800 --> 01:06:13,240
And interestingly, if you were 
to look at their financials and 

1218
01:06:13,240 --> 01:06:15,440
if you haven't recently, just 
take a look at one of their 

1219
01:06:15,720 --> 01:06:17,760
quarterly reports. 
I mean it's, it's amazing how 

1220
01:06:17,760 --> 01:06:21,680
profitable that they are. 
But I mentioned the $36 billion 

1221
01:06:21,680 --> 01:06:25,040
of, of pre tax operating profits
that they generate that already 

1222
01:06:25,040 --> 01:06:29,480
included about $2 billion of 
charges related to what is 

1223
01:06:29,480 --> 01:06:33,320
called a TCCA fee. 
And that's a fee that was put in

1224
01:06:33,320 --> 01:06:37,080
place on these companies related
to basically the jobs and 

1225
01:06:37,080 --> 01:06:40,000
continuation Act that was 
replaced in 2011. 

1226
01:06:40,720 --> 01:06:45,160
And it it wouldn't be 
inconceivable to see that TCCA 

1227
01:06:45,160 --> 01:06:51,080
fee basically be replaced with 
what is an FDIC like fee go 

1228
01:06:51,080 --> 01:06:53,440
going forward. 
And and so even if they do pay a

1229
01:06:53,440 --> 01:06:57,080
fee for that backstop that would
be put in place going forward. 

1230
01:06:57,080 --> 01:06:59,560
And it shouldn't really impact 
that the profitability of these 

1231
01:06:59,560 --> 01:07:02,200
businesses. 
And to the extent that you or 

1232
01:07:02,200 --> 01:07:05,520
anyone else, you know, watching 
wants to do some, some more 

1233
01:07:05,520 --> 01:07:08,000
work, there'll be, there's a lot
of documents and a lot of legal 

1234
01:07:08,000 --> 01:07:11,440
documents where you can find 
out, found out some, some great 

1235
01:07:11,440 --> 01:07:13,080
details about the businesses in 
the process. 

1236
01:07:13,080 --> 01:07:18,400
But there was a report put out I
believe in August of 2020 by the

1237
01:07:18,400 --> 01:07:23,560
CBO and it covered the process 
and the timeline of 

1238
01:07:23,560 --> 01:07:27,360
recapitalizing and releasing 
Fannie and Freddie from 

1239
01:07:27,360 --> 01:07:30,320
conservatorship and putting them
back into the public markets. 

1240
01:07:31,360 --> 01:07:33,920
And they, they had sort of two 
different timelines in there. 

1241
01:07:34,520 --> 01:07:36,560
The first timeline has already 
passed. 

1242
01:07:36,560 --> 01:07:40,760
That was basically the one that 
Mnuchin and Calabria were 

1243
01:07:40,760 --> 01:07:43,400
working on previously. 
And so that the second timeline 

1244
01:07:43,400 --> 01:07:47,440
is a little bit more revelant. 
And I, I believe that they had a

1245
01:07:48,160 --> 01:07:51,200
capital raise taking place in 
2000 and, and 25. 

1246
01:07:51,200 --> 01:07:54,480
And in that timeline they had 
three different scenarios. 

1247
01:07:54,480 --> 01:07:58,040
And, and those scenarios vary 
based upon what the capital 

1248
01:07:58,040 --> 01:07:59,920
requirements for these companies
were going to be. 

1249
01:08:00,680 --> 01:08:04,480
And I want to say that the the 
three scenarios were I think it 

1250
01:08:04,480 --> 01:08:09,640
was about 2 1/2 and in the low 
of 4% in the mid and something 

1251
01:08:09,640 --> 01:08:12,160
like 5 1/2 to six in the high 
case. 

1252
01:08:12,960 --> 01:08:17,200
And since that report was 
published, they've already sort 

1253
01:08:17,200 --> 01:08:19,600
of locked in what the capital 
requirements are are going to 

1254
01:08:19,600 --> 01:08:21,319
be. 
It's going to be closer to that 

1255
01:08:21,319 --> 01:08:26,640
4% range that that mid case. 
It has the CBO outlines in that 

1256
01:08:26,680 --> 01:08:29,880
in that case that the junior 
preferred securities which were 

1257
01:08:29,880 --> 01:08:35,479
invested in or are are basically
completely covered and in most 

1258
01:08:35,479 --> 01:08:38,960
cases likely reinstated higher 
coupons, ones likely to be 

1259
01:08:39,040 --> 01:08:43,760
refinanced down the road. 
The only scenario where the the 

1260
01:08:43,800 --> 01:08:47,240
that there might be some 
impairment to the preferred 

1261
01:08:47,240 --> 01:08:51,200
equities at least in this report
is in that high case where they 

1262
01:08:51,200 --> 01:08:54,279
have that 5 1/2 to 6% capital 
requirement. 

1263
01:08:54,720 --> 01:08:58,240
But I, I think that most would 
would rule that out. 

1264
01:08:58,240 --> 01:09:01,920
I mean, and, and, and instead 
point to the low case, the, the 

1265
01:09:01,920 --> 01:09:04,600
2 1/2 percent requirement. 
That is actually pretty similar 

1266
01:09:04,600 --> 01:09:08,319
to where Farmer Mack is. 
You, you may know Farmer Mack. 

1267
01:09:08,319 --> 01:09:13,279
It's a GSE publicly traded. 
They're at about 2 1/2% of 

1268
01:09:13,279 --> 01:09:16,720
assets because of what Fannie 
and Freddie went through. 

1269
01:09:17,000 --> 01:09:19,439
We probably want to see them 
starting there. 

1270
01:09:19,840 --> 01:09:22,279
But that that's a good report 
and and worth looking at if 

1271
01:09:22,279 --> 01:09:25,040
you're interested to learn more 
about the the timeline and and 

1272
01:09:25,040 --> 01:09:27,760
how things can play out and from
an incentive. 

1273
01:09:27,760 --> 01:09:30,880
Standpoint if they were 
released. 

1274
01:09:30,880 --> 01:09:34,760
From conservatorship some. 
Of the argument is that they 

1275
01:09:34,760 --> 01:09:38,520
would have an incentive to 
compress the spread on on 

1276
01:09:38,520 --> 01:09:42,840
mortgage rates, right? 
Which presumably is in the 

1277
01:09:42,840 --> 01:09:46,720
country's interest now. 
Absolutely. 

1278
01:09:47,120 --> 01:09:50,680
Yeah, absolutely. 
So historically, the, the 30 

1279
01:09:50,680 --> 01:09:55,440
year mortgage rate has traded at
about 150 to 160 basis point 

1280
01:09:55,440 --> 01:09:58,280
premium to the, the, the 10 year
treasury. 

1281
01:09:58,720 --> 01:10:01,000
It's not a perfect comparison. 
The average duration of 

1282
01:10:01,000 --> 01:10:03,920
mortgages has, has historically 
been about 7-8 years, but it's 

1283
01:10:03,920 --> 01:10:07,280
a, it's a good proxy. 
So historically 15160 spread. 

1284
01:10:07,280 --> 01:10:10,840
However, when they were sort of 
out of the market because they 

1285
01:10:10,840 --> 01:10:13,360
were placed in the 
conservatorship that the feds 

1286
01:10:13,360 --> 01:10:15,960
stepped in and, and filled that 
gap. 

1287
01:10:16,000 --> 01:10:22,600
However, ever since they sort of
entered into QT starting in 2022

1288
01:10:22,600 --> 01:10:25,440
and they've been a net seller 
and a net buyer, we've seen this

1289
01:10:25,440 --> 01:10:28,240
historically wide gap. 
But between where the 30 year 

1290
01:10:28,240 --> 01:10:29,880
mortgage rate is in the, in the 
10 year. 

1291
01:10:30,320 --> 01:10:34,320
And in fact, we've seen it kind 
of in the two 5260 range, right?

1292
01:10:34,320 --> 01:10:37,600
I mean, right now the 10 years 
at 4-5 and you know, depending 

1293
01:10:37,600 --> 01:10:40,080
on what channel you're looking 
at, you know, mortgage rates 

1294
01:10:40,080 --> 01:10:44,280
are, are closer to to seven. 
So if you were to, you know, 

1295
01:10:44,280 --> 01:10:46,880
complete the recap of the 
release of Fannie and Freddie, 

1296
01:10:47,160 --> 01:10:49,520
give them a little bit more 
capital, give them the ability 

1297
01:10:49,520 --> 01:10:53,920
to go into the, the market and 
compress spread back to a more 

1298
01:10:53,920 --> 01:10:56,240
normal level. 
That could provide a lot of 

1299
01:10:56,240 --> 01:10:59,400
relief to borrowers and, and, 
and help out with the 

1300
01:10:59,400 --> 01:11:02,520
affordability equation. 
I mean, we ran some numbers and 

1301
01:11:02,520 --> 01:11:06,560
the difference to a borrower 
over the average life of a load 

1302
01:11:06,560 --> 01:11:12,040
is something like 25 to $26,000 
it in terms of interest and 

1303
01:11:12,280 --> 01:11:15,640
principal payments. 
So we think it could make a, a, 

1304
01:11:16,080 --> 01:11:18,840
a big difference. 
And in addition to that, to the 

1305
01:11:18,840 --> 01:11:24,520
extent that this is effectuated 
and in 2025 or or 26, the the 

1306
01:11:24,520 --> 01:11:27,880
Treasury will will recoup a 
significant amount of capital 

1307
01:11:28,320 --> 01:11:30,920
either through their senior 
preferred, the facility that 

1308
01:11:30,920 --> 01:11:33,520
remained outstanding or their 
warrants or a combination of the

1309
01:11:33,520 --> 01:11:35,760
two. 
And that could be helpful. 

1310
01:11:35,760 --> 01:11:39,120
And in terms of reconciling that
the budget or potentially 

1311
01:11:39,440 --> 01:11:42,760
freeing up some capital to be 
invested in affordable housing 

1312
01:11:42,760 --> 01:11:45,680
really throughout the the 
country, I mean to the extent 

1313
01:11:45,680 --> 01:11:47,520
that you. 
Argue that mortgage duration is 

1314
01:11:47,520 --> 01:11:49,680
pushed out because refinancing 
is down. 

1315
01:11:49,680 --> 01:11:53,520
I'm in the 30 year treasury is 
what like 46457 today? 

1316
01:11:54,360 --> 01:11:56,640
Yeah, it's. 
Still a big spread over the 30. 

1317
01:11:56,640 --> 01:12:01,160
Year it it is and and you know. 
There are different components 

1318
01:12:01,600 --> 01:12:04,160
that are built into that, right.
I mean, you have, you know, the 

1319
01:12:04,160 --> 01:12:07,520
option adjusted spread and you 
know, volatility has been higher

1320
01:12:07,520 --> 01:12:10,960
and that could lead to some of 
the additional spread. 

1321
01:12:10,960 --> 01:12:14,400
But if you look at volatility as
measured by like the move index,

1322
01:12:14,760 --> 01:12:17,280
it it's really come back in, but
that that spread has remained. 

1323
01:12:17,720 --> 01:12:21,400
Yeah, you know that that should 
certainly be a a focus. 

1324
01:12:21,400 --> 01:12:24,400
But yeah, I think there are 
there are a lot of benefits of 

1325
01:12:24,400 --> 01:12:27,520
of wrapping up this 
conservatorship process. 

1326
01:12:27,520 --> 01:12:31,000
But compressing nest bread, 
which at the end of the day is, 

1327
01:12:31,000 --> 01:12:33,760
is part of their mandate right 
to promote affordability and 

1328
01:12:33,760 --> 01:12:36,400
foster liquidity and the 
residential markets. 

1329
01:12:36,400 --> 01:12:39,440
And they're arguably not 
completing that, that mandate 

1330
01:12:39,440 --> 01:12:41,000
right now in the in the current 
form. 

1331
01:12:41,560 --> 01:12:44,200
And then to the extent that the 
and what is preventing them 

1332
01:12:44,200 --> 01:12:45,520
from? 
Doing it in the current they 

1333
01:12:45,520 --> 01:12:48,360
have caps They they they have. 
Caps in place in, in terms of 

1334
01:12:48,360 --> 01:12:52,880
how much of their assets they 
can invest and, and MBS as well 

1335
01:12:52,880 --> 01:12:55,880
as caps that they can provide 
to, to multi family. 

1336
01:12:55,880 --> 01:12:57,840
And those could be adjusted 
upwards. 

1337
01:12:57,840 --> 01:13:00,360
And, and, and given the 
profitability of, of the 

1338
01:13:00,360 --> 01:13:04,560
companies, given the net worth 
that these companies have built,

1339
01:13:05,360 --> 01:13:09,760
they, you know, should have a 
mandate to be able to probably 

1340
01:13:09,760 --> 01:13:11,800
increase some of their holdings 
going going forward. 

1341
01:13:11,800 --> 01:13:15,880
Not that it's going to go back 
to where it was in 2006 or, or 

1342
01:13:16,320 --> 01:13:19,600
or seven, but they certainly 
have the capacity to do a little

1343
01:13:19,600 --> 01:13:24,000
bit more interesting. 
It's a It's a thesis I've heard 

1344
01:13:24,000 --> 01:13:26,960
for so long that it's fallen on 
deaf ears and probably shouldn't

1345
01:13:26,960 --> 01:13:30,000
have. 
Well, I mean, there have been 

1346
01:13:30,000 --> 01:13:35,120
some probably unexpected and and
unsettling rulings related to 

1347
01:13:35,120 --> 01:13:37,800
some of those lawsuits of them 
and that were sweep there are 

1348
01:13:37,800 --> 01:13:42,480
very frustrating and I think 
there were a lot of people 

1349
01:13:42,480 --> 01:13:46,200
involved with this for for quite
some time that were were very 

1350
01:13:46,200 --> 01:13:48,920
disappointed with this. 
This SCOTUS ruling was 

1351
01:13:48,920 --> 01:13:52,720
originally I, I guess Collins 
versus minutia when they ruled 

1352
01:13:52,720 --> 01:13:55,480
on it was Collins versus Yellen 
where they, they basically 

1353
01:13:55,480 --> 01:13:59,480
determined that this structure 
and, and their, that the agency 

1354
01:13:59,480 --> 01:14:02,480
overseeing the conservatorship, 
the FHFA was unconstitutionally 

1355
01:14:02,480 --> 01:14:04,240
structured. 
But they didn't provide any 

1356
01:14:04,240 --> 01:14:09,800
relief to vanities. 
And Gorsuch didn't write the 

1357
01:14:09,800 --> 01:14:13,200
opinion there. 
Alito did, but Gorsuch wrote 

1358
01:14:13,200 --> 01:14:16,080
sort of an argument for 
providing relief. 

1359
01:14:17,000 --> 01:14:21,440
And what he sort of called for 
was putting these companies back

1360
01:14:21,440 --> 01:14:25,120
in a position where they would 
have been had this net worth 

1361
01:14:25,120 --> 01:14:31,040
sweep really never taken place. 
And to the extent that something

1362
01:14:31,040 --> 01:14:34,360
like that would be effectuated, 
you basically would have the 

1363
01:14:34,360 --> 01:14:38,720
senior preferreds redeemed. 
You would have the amount of 

1364
01:14:38,760 --> 01:14:42,360
excess payment that's gone to 
the treasury paid back to the 

1365
01:14:42,360 --> 01:14:45,680
the the companies, probably by 
adjusting the strike price on 

1366
01:14:45,680 --> 01:14:48,680
the warrants upwards. 
And and then the companies would

1367
01:14:48,680 --> 01:14:52,200
be sort of free to to exit 
conservatorship, which would 

1368
01:14:52,200 --> 01:14:54,800
have been beneficial for not 
only that the preferred equity 

1369
01:14:54,800 --> 01:14:57,040
junior preferred, but also for 
that the common stock. 

1370
01:14:58,040 --> 01:15:01,200
However, because of that ruling,
as well as probably the federal 

1371
01:15:01,200 --> 01:15:05,280
claims court ruling, it, at 
least in our opinion, it seemed 

1372
01:15:05,280 --> 01:15:08,640
less likely that there would 
ultimately be value for the 

1373
01:15:08,640 --> 01:15:10,800
common stock. 
However, depending on on how the

1374
01:15:10,800 --> 01:15:12,920
process plays out that that may 
change. 

1375
01:15:12,920 --> 01:15:15,640
But we've, we've taken the 
slightly more conservative 

1376
01:15:15,640 --> 01:15:17,480
route. 
We think it, it focused in on 

1377
01:15:17,480 --> 01:15:20,000
that the junior preferreds, 
which even though they, you 

1378
01:15:20,000 --> 01:15:22,560
know, that moved up pretty 
considerably after the election,

1379
01:15:22,560 --> 01:15:27,000
they still trade at, you know, 
40-45 cents of, of par value 

1380
01:15:27,360 --> 01:15:30,760
when you factor in some of the 
damages that the entities 

1381
01:15:30,760 --> 01:15:33,760
actually are likely to receive 
because of some rulings that 

1382
01:15:33,760 --> 01:15:35,840
have gone in their favor in 
recent years. 

1383
01:15:35,840 --> 01:15:39,120
So it's, it's still remains a a 
very interesting security in 

1384
01:15:39,120 --> 01:15:42,560
our, in our view at less than 
50% of par with a likely exit 

1385
01:15:42,600 --> 01:15:43,760
over the next three to four 
years. 

1386
01:15:44,840 --> 01:15:47,880
Are there reasons that? 
Other funds can't own them. 

1387
01:15:47,880 --> 01:15:50,240
Like is there a structural 
reason why there wouldn't be a 

1388
01:15:50,240 --> 01:15:55,040
bid on these or is it just kind 
of out, not something people are

1389
01:15:55,040 --> 01:15:58,280
really paying attention to? 
Yeah, I mean, I think there are.

1390
01:15:58,920 --> 01:16:02,720
Other funds that probably don't 
have the flexibility within 

1391
01:16:02,720 --> 01:16:08,040
their their mandate to invest in
preferreds as well as unsecured 

1392
01:16:08,040 --> 01:16:09,680
convertible did. 
I remember when we were coming 

1393
01:16:09,680 --> 01:16:13,920
out of the GFC, we invested 
about 15% of the the funds 

1394
01:16:13,920 --> 01:16:17,480
capital and RE debt, whether it 
was bank debt or convertible 

1395
01:16:17,480 --> 01:16:20,280
bonds or or unsecured debt. 
And they were very, very 

1396
01:16:20,280 --> 01:16:22,400
profitable investments. 
And what we found is that a lot 

1397
01:16:22,400 --> 01:16:25,280
of our peers actually couldn't 
do that because it wasn't in 

1398
01:16:25,280 --> 01:16:27,920
their sort of portfolio 
guidelines at that at that 

1399
01:16:27,920 --> 01:16:29,600
point. 
And a lot of them change that. 

1400
01:16:29,600 --> 01:16:32,400
They have that flexibility now. 
But I would imagine there are a 

1401
01:16:32,600 --> 01:16:35,120
lot of mutual funds out there 
that they can't invest in 

1402
01:16:35,120 --> 01:16:38,480
preferred equity also. 
But it's not a, it's, it's not a

1403
01:16:38,480 --> 01:16:41,960
REIT per SE. 
I mean, this is a, a, a real 

1404
01:16:41,960 --> 01:16:45,080
estate operating company, more 
of a real estate finance 

1405
01:16:45,080 --> 01:16:48,240
business. 
And so for dedicated real estate

1406
01:16:48,240 --> 01:16:51,520
investors that don't do much in 
C corps, they're probably not 

1407
01:16:52,160 --> 01:16:53,640
looking at at Fannie and 
Freddie. 

1408
01:16:53,640 --> 01:16:56,280
And and also, I mean, because 
the company's in conservatorship

1409
01:16:56,800 --> 01:16:59,720
and it's been such a long drawn 
out process, there are, you 

1410
01:16:59,720 --> 01:17:02,240
know, probably people that have 
just, you know, have fatigue and

1411
01:17:02,240 --> 01:17:04,240
then moved on from it. 
So yeah, I think there are 

1412
01:17:04,240 --> 01:17:07,040
probably some structural 
barriers out there, but you 

1413
01:17:07,040 --> 01:17:08,840
know, over time, hopefully those
are addressed. 

1414
01:17:09,240 --> 01:17:11,880
Yeah, interesting. 
I do want to close. 

1415
01:17:11,880 --> 01:17:14,600
By asking you. 
Why there's no like tower Reit's

1416
01:17:14,600 --> 01:17:16,800
in your portfolio that I that I 
can think of. 

1417
01:17:16,800 --> 01:17:20,680
They're very sexy. 
Why not as long term? 

1418
01:17:21,000 --> 01:17:25,400
Value investors in the real 
estate space, we really focus in

1419
01:17:25,400 --> 01:17:30,080
on companies that are online, 
have durable businesses, durable

1420
01:17:30,080 --> 01:17:33,920
asset values and ones that we 
can get comfortable with over an

1421
01:17:33,920 --> 01:17:37,200
extended amount of time. 
And when we look at that the 

1422
01:17:37,200 --> 01:17:41,360
tower business, it's just one 
where we've been a little bit 

1423
01:17:41,360 --> 01:17:45,480
more hesitant to invest capital 
because historically, I mean 

1424
01:17:45,920 --> 01:17:49,880
they've traded at you know, 35 
to to 40 times free cash flow. 

1425
01:17:49,880 --> 01:17:52,680
And if you dig through the the 
10 KS on these companies, you'll

1426
01:17:52,680 --> 01:17:56,640
actually find that they don't 
truly own all of their assets. 

1427
01:17:56,640 --> 01:17:59,640
And in fact, some of the big 
carriers have option contracts 

1428
01:17:59,640 --> 01:18:02,480
to, to repurchase certain parts 
of their portfolio. 

1429
01:18:02,480 --> 01:18:06,880
And also a significant portion 
of these companies towers have 

1430
01:18:06,880 --> 01:18:09,080
ground leases on them. 
So it's not a, a freehold 

1431
01:18:09,080 --> 01:18:12,840
situation. 
So for us to pay 35 to to 40 

1432
01:18:12,840 --> 01:18:16,160
times free cash flow for a, a 
business where they don't 

1433
01:18:16,160 --> 01:18:18,640
actually own all of the assets 
and own the, the ground 

1434
01:18:18,640 --> 01:18:20,640
underneath them, that, that was 
something that we were hesitant 

1435
01:18:20,640 --> 01:18:22,960
to do. 
But that was tough to live 

1436
01:18:22,960 --> 01:18:26,040
through, especially when the 
tower companies were really 

1437
01:18:26,040 --> 01:18:30,520
benefiting from the 5G craze and
the 5G5G build out similar to 

1438
01:18:30,520 --> 01:18:32,600
what what's going on in the the 
data center space today. 

1439
01:18:33,800 --> 01:18:36,120
But that the multiples for the 
tower companies have actually 

1440
01:18:36,120 --> 01:18:39,840
come back in and, and they're 
kind of trading now in that 20 

1441
01:18:39,840 --> 01:18:43,080
to 25 times free cash flow range
depending on which company you 

1442
01:18:43,320 --> 01:18:46,040
look at, which is a little bit 
more more tolerable. 

1443
01:18:46,440 --> 01:18:49,040
However, the issue is they're 
like most REITs now, they're not

1444
01:18:49,040 --> 01:18:53,320
getting much top line growth, 
particularly in the US, just 

1445
01:18:53,320 --> 01:18:55,600
given the pressure some of the 
the large carriers, their large 

1446
01:18:55,600 --> 01:18:58,040
tenants are under. 
And in addition to that, these 

1447
01:18:58,040 --> 01:19:00,680
are some of the more lever real 
estate related companies out 

1448
01:19:00,680 --> 01:19:02,760
there. 
I mean, if you look at the net 

1449
01:19:02,760 --> 01:19:06,160
debt to EBITDA ratios for the 
tower companies, they're kind of

1450
01:19:06,160 --> 01:19:11,000
in the 8 1/2 to to 9 1/2 times 
range significantly higher than 

1451
01:19:11,000 --> 01:19:12,200
the the broader real estate 
space. 

1452
01:19:12,200 --> 01:19:15,720
And so they're rolling that debt
at at higher rates. 

1453
01:19:15,720 --> 01:19:19,000
And so it's chewing into the the
free cash flows like some of 

1454
01:19:19,000 --> 01:19:21,320
these other property types that 
we we talked about earlier. 

1455
01:19:21,320 --> 01:19:24,440
And the one other item that's 
always kind of just been on the 

1456
01:19:24,440 --> 01:19:27,200
radar as it relates to what the 
tower companies, no pun 

1457
01:19:27,200 --> 01:19:29,920
intended, are, are the low orbit
satellites that are increasingly

1458
01:19:29,920 --> 01:19:33,800
being launched, whether that's 
through Starlink, whether it's 

1459
01:19:33,800 --> 01:19:37,760
through the affiliated entity. 
And and so it's not immediate, 

1460
01:19:37,840 --> 01:19:40,560
but that could certainly create 
a substitute or a threat down 

1461
01:19:40,560 --> 01:19:43,240
the road. 
So because of all those items, 

1462
01:19:43,240 --> 01:19:45,240
we just haven't felt 
comfortable, you know, paying 

1463
01:19:45,240 --> 01:19:46,880
those types of free cash flow 
multiples. 

1464
01:19:47,320 --> 01:19:49,480
But there's some really 
compelling arguments to own 

1465
01:19:49,480 --> 01:19:51,000
them. 
And it's really consolidated and

1466
01:19:51,560 --> 01:19:54,160
I I'd say more interesting 
internationally than than here 

1467
01:19:54,160 --> 01:19:57,160
in the US at at this moment, 
which we've been a long time 

1468
01:19:57,160 --> 01:20:00,920
investor in Brookfield and 
Brookfield has been very active 

1469
01:20:00,920 --> 01:20:02,960
internationally consolidated. 
They've actually the largest 

1470
01:20:02,960 --> 01:20:06,520
tower company in India now. 
So that's interesting. 

1471
01:20:06,520 --> 01:20:08,480
Cash flow multiples are much 
more tolerant. 

1472
01:20:08,480 --> 01:20:11,520
They just carved out a portfolio
from American Tower, I think at 

1473
01:20:11,520 --> 01:20:15,120
like 6 or seven times EBITDA, 
but much different than what we 

1474
01:20:15,120 --> 01:20:17,240
see here. 
So yeah, we just haven't done 

1475
01:20:17,240 --> 01:20:21,120
much with the the pureplay tower
companies in our our fund today.

1476
01:20:22,600 --> 01:20:25,320
I used Starlink. 
During the hurricane in the 

1477
01:20:25,320 --> 01:20:28,960
aftermath and I found it to be 
quite good actually had a little

1478
01:20:28,960 --> 01:20:32,640
bit of video buffering. 
But I said to myself self, this 

1479
01:20:32,640 --> 01:20:34,800
gets a little bit more reliable 
and a little cheaper. 

1480
01:20:34,800 --> 01:20:37,280
I could definitely see it as 
absolutely. 

1481
01:20:37,280 --> 01:20:40,360
I think it's only going to. 
Be on more people's radar and 

1482
01:20:40,680 --> 01:20:43,840
given the shift to we're 
expecting to continue from urban

1483
01:20:43,840 --> 01:20:47,240
to suburban, even suburban to 
rural, it really changes that 

1484
01:20:47,320 --> 01:20:51,000
dynamic and a lot of those 
tertiary or markets that are 

1485
01:20:51,280 --> 01:20:54,600
plugged into to fiber or don't 
have, you know terrific tower 

1486
01:20:54,600 --> 01:20:57,560
service right now so yeah, 
that's something people should 

1487
01:20:57,720 --> 01:21:00,120
definitely have on their radar 
as they're underwriting or 

1488
01:21:00,320 --> 01:21:03,760
investing in the tower space in 
our opinion yeah well, it's. 

1489
01:21:03,920 --> 01:21:06,480
It's like one of those things, 
the the, the multiples sort of 

1490
01:21:06,480 --> 01:21:09,080
imply that the duration is there
and it's what is it? 

1491
01:21:09,080 --> 01:21:10,560
It's not what you know that gets
you in trouble. 

1492
01:21:10,560 --> 01:21:11,960
It's what you know that just 
ain't so. 

1493
01:21:12,840 --> 01:21:15,160
That's a good point, yeah. 
So we'll see. 

1494
01:21:15,160 --> 01:21:17,040
Yeah, almost ready. 
Well, cool, man. 

1495
01:21:17,040 --> 01:21:18,400
I appreciate you. 
Stopping by. 

1496
01:21:18,400 --> 01:21:20,960
Thanks for working through some 
of the technical difficulties 

1497
01:21:21,040 --> 01:21:22,720
and appreciate it. 
Yeah. 

1498
01:21:23,120 --> 01:21:26,120
I'm glad that we could do. 
This yeah great to great to 

1499
01:21:26,120 --> 01:21:26,760
catch. 
Up with you. 

1500
01:21:26,760 --> 01:21:29,280
And I've learned a lot from a 
number of your episodes, so 

1501
01:21:29,280 --> 01:21:31,920
hopefully there's a nugget or 
two in there that's useful for 

1502
01:21:31,920 --> 01:21:33,560
you and, and, and your 
followers. 

1503
01:21:34,000 --> 01:21:35,440
Well, it's good that you had 
some. 

1504
01:21:35,440 --> 01:21:38,320
Pushback on the REIT stuff. 
I I wish that I had dropped you 

1505
01:21:38,320 --> 01:21:41,560
in between some of those 
episodes, but alas, at least 

1506
01:21:41,560 --> 01:21:43,200
you're here to give the other 
perspective. 

1507
01:21:43,200 --> 01:21:45,120
So thank you. 
Yeah, of course. 

1508
01:21:45,680 --> 01:21:47,080
All right, have a good one and 
we'll. 

1509
01:21:47,080 --> 01:21:48,600
Chat soon? 
Yeah. 

1510
01:21:48,600 --> 01:21:49,160
Thanks so much.