Ladies and gentlemen, how you doing?
It's Bill Brewster, your host of The Business Brew.
As always. This episode is the third one
featuring Bill Chen. He came back for another update
on the retrade. I like to kind of do these over
time and check in with people and see how their ideas are
going. Check out Ryan Dobrats for a
different type of real estate podcast that is about the less
capital intensive side of real estate.
This one is about the more capital intensive side of real
estate, but I generally I like how Bill thinks.
So he's back on this week and I'd say that the beginning of
the conversation is kind of macrowy, tariffy and the real
estate section probably starts, you know, 30 minutes into it or
whatever. I mean, the tariff part is kind
of weaved in and out. So that's how the conversation
structured. I hope you enjoy it as always.
It was recorded on April 16th. Going to try to get it out
reasonably quickly and thank you for listening.
As always, nothing in this podcast is investment advice.
Everything is for entertainment purposes only.
Please consult your financial advisor before making investment
decisions and do your own due diligence.
All right, ladies and gentlemen, Bill Chen back.
We're going to check in on the Read Read idea, how it's been
going, what's been going on. But Bill was just educating me
on when the VIX hit what, 50? If you had, you could make 5% a
month by selling puts if you're willing to own the underlying
what at like A7 cap. Yeah.
There were companies like Qsmart, Prologis where you were
like if you so puts 5% out of the money essentially buying
into at apply somewhere in in that mid 6T7 cap range, you can
make 5% in approximately 5 weeks.
And I haven't checked the pricing today, but it's probably
still a really good pricing. And you try to explain that to a
private real estate investor that all you got to do is just
commit to buying a diversified portfolio of high quality Class
A self storage or warehouses. Yeah, electrologist, you could
make, you know, 5% in five weeks and you annualize that number is
probably better than any private lending products out there or
any sorts of, you know, really like any product out there.
But obviously, like whether you could do that 12 times in a row
in a year or, you know, 1011 times in a row, they're right.
Like that's up to debate. Yeah, well, do it once, make you
5% a month, and then maybe you can do it again, right?
What's going on with Prologis? Why is it so weak?
If you look at nationwide when you were seeing so so I want to
give people like a little bit of contact so that the listener air
stands. Yeah, give, yeah, give people a
background on the company, but it's always been a company that
I've heard talked about positively and seems good from
the outside. So curious.
To your thoughts, I'll give like a little bit of intro of
warehouses in general in in the past decade and you know, the
kind of valuation that it got to so about call like a decade ago
with the rise of e-commerce warehouses, which this was like
a sleepy asset class. It it kind of got hot, got
popular with investors and blocks almost kind of go around
the country buying up almost like every warehouse.
You know, anyone who owns a portfolio that was over
4,000,000 square foot black, someone was knocking on the
door. And, and this is what happened
was rise of e-commerce meant that there is a much higher
demand for warehouse space. And so it you know, cap rates
started out, there was a recall gramacy and gramacy was a very
successful read that was buying at a 8% cap rate and then issue
an equity at 6% cap rate. And they did really well within
the few years of 6 pack year. And then the cap rates for
warehouses literally went from roughly 8% coming out of
recession. It kept compressing year after
year. And you know, at a certain
point, I think most real estate investors started realizing that
this, you know, this is a big secular trend.
This is a multi year trend. And warehouses kind of lost
this, you know, reputation as a cyclical asset that doesn't do
well in the recession. And the cap rates kind of, you
know, with in a zerk world where your 10 year treasuries 1% and
you buy warehouse at a core at a 4% cap rate.
And the rent was also growing something like 10% a year
depending on the market that you're in.
If you look at a warehouse chart or Prologis, Rexford, Torino,
really any of them, first industrials, really any of them,
it's just like unbelievable chart from cold like 2020, I
started 2014 to 2016 to 2021. It is just like a heck of a
chart. And you know they all took
advantage of it. They all issue equity to go buy
more assets. And it is one of those rare
asset classes where we investors kind of gave management team the
discretion to have development pipelines.
So they all had development pipelines, which is very rare.
And then Fast forward to 2022. So when COVID happened and you
know, the supply chain kind of what this is going to sound very
similar, right? The supply chain got disrupted
and everybody started hoarding inventory.
We are all stuck at home all ordering, you know, e-commerce.
If you look at the growth in the e-commerce chart, they
e-commerce grew something like five points done COVID, right?
Like I don't think second blowing like huge spike and
everyone rush to take warehouse space because when you start
getting down to that two 3% vacancy rate, people start to
panic, right? People start to panic, people
lock in, you know, warehouse space and then you just like
have a lit like. When you say people, you're
saying. When you say people, you're
saying, like the customers that need the warehouse space start
to see the supply get tight and they start to worry.
Oh, my goodness. If I need more, it's not going
to be there. And that's what causes the
panic. Yeah.
Yes, yes, no, that's exactly correct.
It's like imagining if you are some a customer in Southern
California where a lot of logistics, you know, a lot of
the freights come into Southern California and you know they
were you, you needed to stack the stuff somewhere.
There were like ships waiting offshore to offload.
And I remember talking to people that worked in the industry and
they were sending me pictures of just like full warehouses.
Yeah, yeah. That was wild.
Yeah, it was. Absolutely.
That makes sense. It was absolutely wild and.
That's then you have a natural supply response in something
like real estate. So warehouse gets built, right?
Yep, Yep. And then you hit a little bit of
a bullwhip. Yep.
No, that's exactly and and the bullwhip.
I think if you look at the bullwhip, the bullwhip happened
a lot quicker to the retailers, right, because the retailers did
really well in 21 and then by kind of 2223 that like everyone
figure out that was a one time pull forward of the man.
And but like if you sign a warehouse lease, you locked in
for at least you know, 3-5 years.
So now the warehouse is starting to reflect kind of like that
over utilization of warehouse. And so Southern California like
like a market like Southern California got down to maybe 1
to 2% vacancy and that that kind of vacancy you kind of charge
whatever rent you want, right? That's just the nature of why
supply demand. And now the Southern California
rent is actually falling because that vacancy just by going from
really tight 2% to COAB like 4% today, maybe that tidy little
2%. And then, you know, obviously
they built more in the Inland Empire.
And this story kind of I'm in Southern California is a very
unique dynamic, but like this dynamic played out everywhere in
the US, right? And then there are markets like
Chagall and Dallas where there there are less barriers to entry
and they could build a lot more just going further out, right?
So and then like also think in the zerpero in that sub 1% yield
in a 10 year environment, you know what people what kind of
cap rate people willing to pay. If you look at some of the
public Reit's like Rexford, I think Rexford literally traded
with A2 handle cap rate, right. And I think the market was like
kind of justified that well, if you look at the in place leases
it, if you fully market to market, there's 5080 even 100%
upside sometimes. So, so they think if you're
paying too, by the time you fully market, market, you're
really in the fours. I mean, we were kind of getting
out, we were getting out of all our warehouse positions at the
time. I mean, you know, we had a
couple called Induce Realty that got bought out by GSE and that
so, so they got bought out and like Prologis and all the other
warehouse reeds were going through this long painful
process of, you know, adjusting to you a 4.3 percent, 10 year,
you know, treasury yield. So you have cap rate expansion
and then I think the moment the Canary in a coal mine was when
Amazon on the earnings call said they they took up too much
warehouse space and they were not going to take up any
warehouse space anymore. And we kind of saw that and that
was like one of those rare success in moment of clarity.
That was like one of those rare moments where we heard that and
we're like, we're going to short Prologis and by puts in it on.
And that was because you kind of have this perfect setup of
inflation was high, interest rate was likely going to go up
in early 22. You got Amazon, which at what
point was absorbing something like 20 to 25% of all the new
construction, warehouse construction.
So you have one of the biggest, you know, absorber warehouse
space coming out and saying that we took too much space, we don't
need it anymore and 20% of your absorption kind of just went
away. And then yeah, what Capra
expansion from a two to three, you know, to 3% cap rate.
It was just so like we could kind of see the writing on the
wall. That's got to be painful and
that's not going to be pleasant. And then but Fast forward today.
So that's kind of like a little bit of a history lesson there,
right? So Fast forward today, of
course, like like now that, you know, nationwide vacancies in
the MIT, you know, single digit number kind of, and those is the
exact number right now. But now we're getting to the
point where we're like, OK, you could buy Rex for, you could buy
Prologis, you could buy a lot of, you know, a lot of these are
high quality diversify warehouse reeds at over a 6% cap rate.
And there was a time where it wasn't that long ago, maybe like
3-4 years ago, everyone's like, oh man, you got to get in some
of that Southern California warehouses, right?
It just a licensed print money because everyone wants that
demand and you can't build anything in Southern California
and Rexford is low way down from 80 bucks to low 30s right now
and they don't have a lot of leverage, right.
So that's very reflective of a on lever drop in market price
and Prologis I think was in the 16170 and the trades below 90
bucks that the whole time, the whole time there's been
significant rent increases because remember there were, you
know, rent increases from but you know, every time they signed
a new lease, they signed new lease were renewal lease.
I mean, they were getting 4050 sixty percent rent increase also
that rent increase have come down because now what you have
is you have market rent flatten out and in some markets and
eighteen of those markets actually trending downward,
right? So, so, but like that mark to
market is still very, very significant.
And for most of these suites, you know, most of these suites,
they're still getting a cash uplift of, you know, 2030% when
they mark the market. Now the markets kind of freaking
out and saying, well, what is like like could they still get
20 thirty 30%, right. The previous assumption is when
you mark to market, you could bring that lease up, you know,
6080%. Now they're worried OK, well,
can you like, can you, can you get 20?
Like is that got to go to 10? Is that got to go to 0?
So you know, that's. Especially looking at a
potential recession and a bunch of weak business confidence.
Yeah, sort of survey. Did you maybe think?
Yeah, yeah. And a minimum that should be
delayed, right? I think that kind of what I've
been worried about for 10 years, which is when we do get a
recession, what's gonna happen to warehouse utilization, what's
gonna happen to warehouse occupancy?
And now that risk truly is like being manifested.
The market truly actually worry about that because for a good
6-7 years that was never like a concern for the warehouse REIT
investors. Yeah.
Yeah, I don't know.
It's interesting, it's funny, I, I hesitate to say anything about
anything anymore because the longer I've talked on podcasts,
the longer I've realized, the more I say, the more I'm bound
to get wrong because life just doesn't usually work out the way
that that it seems. However, I did say on the Evan
Tyndale podcast that I've been pinging my friends saying, why
do we own socks? And part of why I said that is I
don't think that the administration this time around
is really, I mean, look like, you know, when we had that big
Ripper of a rally, the administration kind of spiked
the football and they were like, look at how great we are.
But I don't, I don't think that they're like that into the stock
market and the wealthy doing well.
And to the extent that the wealthy drive a lot of
consumption, what kind of goods flow do you get through these
warehouses if you know there's a negative wealth effect going on,
especially at the same time that you've got a tendency to be
focused on austerity relative to where we were.
And the Fed doesn't seem to be there.
So it's kind of, it's kind of an interesting setup.
I haven't been rushing out to buy this dip aggressively.
I, I think if it's potentially, I don't know, it's always
historically been a great idea. Maybe it's a great idea now, but
it ain't what you know that gets you in trouble.
It's what you know that just ain't so.
Yeah, like it's, it's definitely been very, very difficult trying
to anticipate. How do you how to position
yourself in this environment? Right.
And luckily, we had a member on our team.
We have an analyst on the team who's been pounding the table
since late December about, you know, Trump tariff policies and
how that may impact the equity market.
And we have some really uncomfortable, uncomfortable
conversations about is this real?
Is this not real? And he kind of insisted that if
you read, you know, what Trump was saying 30-40 years ago.
And if you look at JD Vance's background and as the banner's
background and you look into kind of like that demographic
that Co for of the, you know, the Rust Belt where all these
factories kind of got emptied out and a lot of those jobs went
over to China. You know, he's basically say
they're more serious than the market or pricing in.
And we kind of, we had a lot of back and forth and a lot of
uncomfortable conversation on this topic.
And I kind of get like, what I jokingly call myself the George
Soros backache. Like, like at times, like I
would just kind of feel uncomfortable about a certain
setup, certain working environment.
It's kind of like you walk onto a subway and then there's some
guy who's just like talking to himself and he's like having
like spasms. Like I'm like, OK, like, I'm
just got to walk the other way. I'm going to get myself out of
the situation, but I kind of have these intuitive sense about
some sort of risk and then we wind up going out and buying a
lot, you know, a bunch of out of money puts.
The last time that I felt that way was right before the onset
of COVID and I was like tracking what was going on in China.
And we went out and we bought puts in Royal Caribbean on the
S&P 500 index on Tesla and Nike. And I really like large liquid
names that have really cheap out of money puts.
And we kind of did the same thing this time around, right?
Like we will puts in the indexes, we will put some Royal
Caribbean again, we generally just had a view that the market
was not pricing in the tariff risk and how serious and there
was a specific deadline, right. You know there was the
liberation day had a specific deadline on when this was going
to be announced. Now to be fair, when they
announced the tariff rate, I don't think I that exceeded like
my concern about what the actual rates are.
And then if you pay attention to like what the rates are today,
it's kind of nuts. I mean, what where they are.
And I kind of think back to you 20 years ago when I used to Co
call a lot of manufacturers on and I was working for a glass
importer and I will Co call all these, you know, small amount of
power. Like people make picture frames
and they buy glass cheaper imported from China or Korean
manufacturers. And I'm just kind of thinking,
I'm doing the math in my head. If they place an order for
$100,000 of, you know, flak, flak glass now, like I don't
even know what that tariff rate would be, but I think it's 140%.
So you place an order for 100K for your inventory, you know,
like the customs officers, like no, like you got to come down
with 245 K. And like what kind of small,
like small businesses just don't have that kind of working
capital laying around. And I think that people, I think
people really underestimating that dynamic and that what that
does to OK, like now you may have to tell what are your
employees to let them go. I think we're still in the early
stages of that. And depending on how long the
tariff lasts, this negotiation lasts, like I think we're going
to really start seeing some of those effects.
Yeah, well, the interesting thing too is Besson said the
other day, the tariffs are the easy part.
It's the non tariff trade barriers that may take a little
bit longer to figure out. You know, to the extent that it
seems to me, and I think this is becoming fairly consensus.
I mean, I just saw it in the journal, so it's probably the
the idea. You ever listen to Peter Zihan?
I, I myself have not, but my analysts have, yeah.
Right. I mean, a lot of people have
like criticisms of him. I think directionally what he's
been calling for has been right, which is basically like a
bifurcation of the Western and Eastern hemispheres
economically. And that does seem to be what
they're trying to accomplish here.
It's just an interesting proposition because I mean one
we'll see if it's successful as a citizen.
I hope whatever the definition of success is achieved.
But you know, for a long time this has been a system that's
benefited a lot of people and corporate America I consider as
one of those parties to the extent that we're reversing it.
I don't know if it's quite the Uno reverse card or maybe
there's a way to get through it all without, you know, having a
lot of slack go through the warehouses and you know, people
losing their jobs, which I think would hit multi family Reit's.
All those things, though, should in theory reduce new supply.
So there's always that, you know, it's always the and then
what question, right? Yeah, yeah, man, this is Bill.
You're hitting me with all the really hard stuff up front.
Well, I mean, I don't, I don't even, you know, there's no, I
don't think that you can come on a podcast and have answers.
I mean, you know, I watch some podcasts, they get good ratings
when people act like they have the answers.
But I just think it's an interesting environment.
I do think that this phrase of the decline of American
exceptionalism, like, you know, try not to get too fancy with my
terms, like I just like to explain it.
The what term? The phrase the decline of
American exceptionism, right? Yeah, OK, OK.
That's kind of been, I think I, I just kind of viewed as, Hey,
if you operate in a market like this is how I would just
explain. I'm like, if you operate a
market where there is rule law and the rule doesn't change
daily, people are going to pay a higher multiple for that stock,
right? And if you operate an
environment where people can't trust you and the rules keep
getting changed, you know, people are going to get scared
and they probably don't want to pay as high of a multiple.
The same reason why Costco trades at a very high multiple
and then a cyclical company like an airline don't, right?
Because you don't know, it's a very simple concept, right?
Like you want like steady recurring cash flow.
And it's like the way that we're trying to position portfolio is
we, I think initially there was a way to position, identify
which companies will get hurt by tariffs.
And now the games are changing so fast that it's hard to like
play that game, right? Because like if you were
thinking of a company like Apple that, you know, the Worship
Journal had an article that says that an iPhone cost $600 to make
at 145. Like, like the tariff alone is
like 900. And then over the weekend, you
hear that, that there's an exemption on, you know, all
these electronic products, right?
And then like, kind of what like came out and said, well, no, no,
no, actually there is no exemption like that.
Just like makes my head hurt, right?
You know, you're like, you're like, how do we price a stock
like Apple, right? Yeah.
Well, yeah, they're messaging has been very mixed depending on
who's delivering the message. And I think so, so we've kind of
thought through and we kind of decided to position the
portfolio in such a way that that I think the odds, you know,
we're trying not to be tariff experts, right?
We're trying to just kind of think along the line that
recession, odds of recession is likely higher, right?
Multiples are likely lower across the board, although you
know, if you look at multiples pay for companies like Walmart
and Costco and Centas like like I don't know how given
everything that we know, you know those couple ways like
Costco and Sinto still trade at like 50 times earnings, right?
I I want to be a value vessel without complaining about
Costco's multiple, right? Love their product but you know
I hate their multiple. If you think everyone's a
rational actor, if you actually believe that, and I've
complained about Costco's multiple for a long time and
been wrong. So take that for what it's
worth, But I guess you could say, OK, the probability that
they're not, let's say I only get 2% real if I'm already
really wealthy, 2% real doesn't kill me.
You just gotta be willing to lock in the duration, right?
It doesn't necessarily. To the extent that you've
already made your money in Costco, it may not be about
optimizing for return at this point.
You know what I'm saying I mean. Yeah, yeah, no.
Now the market overall should be selling something to optimize
for return and I don't actually believe that.
I think it's people hiding out in places and I think it's, you
know, short term stuff. But if I had to make the
argument, that's the argument I'd make.
Yeah. And then and then I think that's
where I will make the argument where going back to you some of
the Reeds and at multifamily because we had at this point
that this will kind of be like a third podcast on Reit's right on
multifamily. Oh yeah, that's right, we did
the space. I forgot we did.
This Yeah, Yeah, we did the space like at the almost like
close to the bottom, right. Like that was awesome.
Yeah, that was awesome. And so like, like if you're
wealthy already and you could buy Costco at like essentially
2% cap rate, right? If you invert to multiple at 2%
cap rate, it grows faster, right.
Better company than multifamily, right?
But like you don't get a dividend, you get a half a
percent dividend. So you're buying something at A2
cap, right? Growing fast, but actually not
as fast as like Southern California industrials back in
21, right? So you're starting at 2% cap
rate and then versus like you could buy multi family and get
almost like, you know, around like a 4% cap rate today.
Or you could buy something like AQ smart, which is self storage,
which is like a MIT 5 dividend yield, you know, MIT 6 cap rate.
Like like if you're wealthy already, now you actually get
like a current income. So I don't know.
I mean, like to me, you're not buying, you know, a company like
Q Smart or Mid American is not as good a company as Costco,
right? But I think that it's not grown
as fast, but I think that the current yield and the multiple,
like if you invert the multiple, you're probably, you know,
you're paying somewhere in the teens multiple for these
companies versus you're paying, you know, 50 something.
And then it it it means like years and years have grown into
it now, like nothing I'm saying is new, right?
But like, you know, if you want to make the argument that like
if you're wealthy already, I'm like, I rather own some of the
apartment reads and some of the self storage reads.
And you know, this isn't this also isn't like some tertiary
market Class C asset, right? Most of these assets, my
analysts and I drive around in Queens in Brooklyn that we look
at some of the Q smart and you know, this is where like I could
kind of get a little weird with like what I think an attractive
asset look like. I look at like a six story Q
smart self storage in the middle of Brooklyn surrounded by 15
story apartment buildings. And I'm like, that's a beautiful
asset because I know from a NIMBY perspective, no one's
going to be able to like it's very difficult to develop new
storage in Brooklyn, Queens. And I look at that asset and I'm
like, that's gorgeous, right? Because like, I know from a new
supply perspective, I know that there's very little.
And then if you go to a market, so like there's certain markets
like in in parts of Florida and in the Sunbelt where I'm a part
of problem with like a lot of these sell sorts reads why they
haven't worked in a while is that they built again, they
built a lot of new supply in, in that 2122 vintage and they're
all coming online. They're bringing on supply.
I mean, real estate is the ultimate capital cycle, you
know, industry, right? And I think that that today
we're in a great environment. I was just looking at the
construction for warehouses, you know, a chart for construction
for warehouses. I mean new construction is
probably new starts got to be down like 60, you know, based on
chart like 6070% set as soon as its peak in 21.
And then we talked a lot about multifamily.
This trend of construction starts dropping is like
consistent across all, you know, real estate sectors.
What is the development math look like with rates where they
are right now? It looks fantastic for them
because they could such a borrow, you know, in the low 510
year fix unsecure and then they could go build something, you
know, stabilizing that to call it, you know, generally over 6%
cap rate in most of the most of the major food groups like multi
family social storage and warehouses.
And also once you build it that generally you could kind of bake
in rent growth over time, right. So I predict that REITs will
become, you know, a lot of the private real estate developers
have kind of that they've been on the sideline.
They can't really develop new projects.
The cost of fact, the cost of capital is just too high.
And then Reeds have this very unique dynamic where they're 20
to 30% loan to value ever that sub six times net debt to EBITDA
and the unsecure mark unsecure bond market is very open to you
what you're letting them borrow at in the 5% range.
You know, we even saw a couple deals done in the high force,
right. So, so they have all the cost of
capital advantage right now on the that side.
That's wild to me that they can borrow there given where
treasuries are, but they're a beautiful thing.
Let's think through, right, the implications, right, if you
could buy so, so let's look at like the interest rate coverage
ratio, right, the fixed cost coverage ratio.
I mean, now most of the REITs that we own, the larger blue
chip ones, the interest coverage ratios anywhere from like 4 to,
you know, sometimes even 10 times, right?
So, so if I'm lending you money, if I'm lending money to anybody
and you could cover my interest payment 4 to 10 times, like yes,
like, you know, the 10 years at 43, like I want you money, you
know, at 5% right now, granted in the next 10 years, like if
you do something crazy, if you make a big acquisition, that's
kind of a risk, right? But like a lot of these bigger
reads, kind of half mandates, not written mandates, but they
kind of have these like, you know, unwritten agreements that
they got to keep net that's even up below 6 times.
So you're what, picking up that like 7080 a hundred BIP spread
over the 10 year treasury actually is a pretty, pretty
good risk reward. Yeah, Yeah, I can see that.
And the other thing is you're doing it by providing, you know,
shelter, right? So in Maslow's hierarchy, pretty
high up there. Yeah, well, shelter as storage
of useless stuff that Mercas love the.
Border, right. Yeah, Well, it's basically the
same thing in America. The massive hierarchy of knees
is it's not shelter in the bottom, it's your smartphone
nowadays, right? Yeah, you're not wrong.
Which is an issue. It's.
Smartphones, shelter, food, like shelter food that that's all in
the car and then just like just above, it is like the need to to
store like East West stuff, right?
Yeah, that's, yeah, that's exactly right.
And then stuff like sleep, I guess it'd be below it, right?
But yeah, yeah, either way, yeah, that's wild.
Yeah. But it's only kind of a joke.
It's whoa. I mean, you know.
There's a lot more truth to it than I'd like to admit.
A joke is funny because there's some truth in it, right?
Yeah, that's correct. Yeah, that's correct.
If it's totally outlandish, like it wouldn't be funny.
Yeah, that's right. Yeah, that's right.
Yeah. So I've seen you on the Twitter
machine, you talk about hard assets.
Why have you seem to at least be looking at some of these like
offshore drilling assets? I know it's not, that's not why
you what you came on to talk about.
But just curious, you know, when you think about real estate from
a first principles standpoint versus like, you know, you run
an investment product that is real estate focused, do you keep
coming back to that you like the real estate side?
It seems as though your tweets at least would indicate that you
prefer real estate the offshore, but that's, you know, those are
two totally. Oh, no, I mean, this, this, this
is a, this is a great conversation, right?
Let's dig into the first principle of why, why people
even make money at real estate, right?
Like that's, yeah, you could go through.
There's a topic that I find that I did it, I did eye banking for
a couple years and I didn't have an answer for that.
And This is why in a place like New York, you wind up with
immigrant families who bought real estate 20-30 years ago and
they don't speak any English. They don't make a lot of money,
but they bought the real estate in the early 2000s, late 90s.
And then their tenant is some Ibacker who like pay a good
chuckle their rent to like my family's kind of partially like,
like we took a lot of risk 20 years ago in the early 2000s and
we didn't know what we were doing.
But like my are just like rent typically go up over time,
right? Your mortgage rate is fixed.
And then we bought a couple and we wind up with, you know, a
dozen of properties like call like 6070 units that we own
between all the families where, you know, between my siblings
and not. And it's like, why do real
estate, which is hard asset go up in value?
And why is it if you look at the long term chart or the
Transocean and you know any of them, they gone bankrupt, right?
But and then like if you look at the wanton shadow Transocean, it
is a really ugly chart, right? And then you could look at
something like a pipeline, right?
A lot of these like offshore drilling that they call like
floating pipelines, you know, like the shuttle tankers.
So, so, so I've like looked at all of them, right?
And my brain initially kind of got excited and I'm like, oh,
look at the contracts. Like it looks like it's the same
skill set. It's a very long lift asset.
You could kind of like forecast the cash flow because a lot of
them have, you know, long term contracts in place.
But like, why is it that one hard asset that floats out in
the ocean in the long run, like just burns through a ton of
shareholder equity And then the stuff that's on land that's like
immovable that you can't move, like somehow creates a ton of
shareholder value. And I think like on a first
principle basis, if you break down, for example, good example,
be like a warehouse in like a decent barrier to entry market,
right? Let's say in Brooklyn, right, a
warehouse in Brooklyn. And I'm picking a warehouse on
purpose because like the maintenance CapEx, it's easy
because there's very little maintenance CapEx, right?
Like maybe every 5020 years you got to replace the roof, right?
It's just a structure. So over time, what, what really
appreciates if you think about like there are four things that
consist of real estate, right? There's a land that it sits on,
there's a structure above it, there's the interior and then
there is like the intangible, right?
What is the intangible? The intangible is that in some,
in certain high barrier to entry markets like a Brooklyn or New
York City or Southern California, it actually takes a
really long time to get the approval to go build it, right.
So think about, if you think about like what actually goes up
in value over time, I think we could all agree that the land
usually go up in value, right? The structure goes up in value
because the replacement cost to recreate that same structure.
Yes, that brick may be 30 years old, but it's really like that
steel i-beam maybe 40-50 years old, but there's no real
depreciation on that 40 year old i-beam, right for that
warehouse. Now the interior like the roof
that really do depreciate that there's real depreciation with
that. And then I would say they had
the intangible to get the approval by the government,
local government to allow you to build.
That actually goes up in value because it just becomes more
difficult. I think as most places in the US
densify over time, your lead time to develop, to go build
something. Actually, there's just more
government red tape, right to build more.
Yes, the lead time actually gets increases.
So, so if you compare a warehouse to this floating
structure out in the ocean, right?
So you know, that hunk of steel, which by the way, is an
impressive feat of like engineering and human
engineering, right? Like what they're able to do is
like absolutely incredible on some of those, you know,
offshore rigs. But the reality is that what
that salt water is truly destroying that huckle metal out
there in the ocean as impressive it is, right, 20-30 years later,
like it's worth as much as, you know, scrap metal, right?
And that's the ocean. No one's got claims to it.
There's no what like those three, what the land value, the
structure value and the intangible, none of it is
appreciating. So, so like in my opinion, like
I developed this mental model for thinking about what truly in
every asset type, right? So you could go from office to
warehouses to self storage to multi family.
There's a certain intensity, it's a fight between the land
and the structure appreciating, right, and the interior and the
sub that truly depreciate. This is why each real estate
asset class have different cap rates, right?
And a warehouse, you know, could have a lower cap rate than an
office because there's very little maintenance CapEx on it,
right? And there's even a new real
estate asset class called industrial outdoor storage,
which is just a giant parking lot that you park like a cable
company with a ton of trucks, right?
They need a place at the end of the night to come back and park.
I love that. I love that because now you
don't even have a roof to repair, right?
Like it's just a asphalt, you know, paving that you maybe like
every whatever number of years you got to.
So that's why I've never really, I guess my brain likes to psych
scarcity right now. This doesn't apply to everything
I do right there. There are like other businesses
that I look at where I do apply an abundance model.
But when it comes to real estate, I generally like a
scarcity model where you're kind of like the choke point, you're
kind of, you know, just like this.
As much as we we say we want to build more housing, as much as
we say we want to build more, the reality is that there's an
innate cultural, you know, identity where people are like,
yeah, we need more of that, but not in my backyard.
We need more of this, but not in my backyard.
Like, yeah. And that's something that I'm
willing to bet on. Yeah.
And, you know, to the extent that you're in a city, obviously
you can build new buildings, but it's not so easy I.
Mean, you know, we, we get to do some of the details.
My, my younger brother has built a couple buildings here in
Queens and at times he will complain to me what it takes to
build in New York and some of the horror stories.
I mean, it's literally it gets to the point where you know, we
have a special fondness for like New York City residential, even
with like all the crazy rent regulations, etcetera, etcetera
and the tenant rights and whatnot.
But if you try to build in New York City, your neighbors
sometimes knows that this is an opportunity to shake you down,
right? They know they can exert a
certain amount of pain, argue where they'll call the building
department. They say, oh, like you didn't
implement this right. Building hard comes by like
shuts you down for 2-3 days. And then, you know, it's lost
time loss of like your GC, like now they got to like redeploy
people elsewhere. I mean, we can go through a
whole list, right? We go through a whole list,
right? And then you run into things
like, oh, you know, we actually don't want people to install
natural gas, you know, stoves in the city.
So we're not issuing any more natural gas like permits, right,
for buildings, like you gotta go all electric.
I think people like under appreciate like how much risk a
developer has to take in order to get a building, you know, off
the ground in New York City. And now I'm starting to see
evidence that's kind of starting to happen everywhere, right?
Like if you could ban them, one trend is that 10 years from now,
even places like Dallas and, you know, places that are known for
very business friendly, it's got to be harder to build new supply
essentially like everywhere in the US.
Yeah. And you know, it's good to have
that tailwind. It's good to have that tailwind
when you invest in the asset class, you know, versus that
saltwater continuously slashing on the drill work and just, you
know, depreciating it down to nothing.
Yeah. And I mean, look, you got
fashion risk with real estate, right?
But if you have a building to pull out or re face cabinets or
whatever, it's not. We're not talking about the end
of the world. Yeah, from a capital
perspective, right? Yeah.
I mean, it's like you got to do it, but it's not crazy.
I think, I think it's really talking about hotels.
No, I mean like like condos, they get a little bit tired,
right? Or apartment buildings rather,
Like if you're going to lease them up, you do need to have an
on trend kitchen that you're selling people.
I mean, maybe not New York, but you know, like Denver, you got
to have something that people want to live in.
Oh, no, I'm in. You're totally right.
I think more so I think that on trend intensity is a lot higher
depending on like where you sit and the market that you're in.
And sometimes I do need to take myself out of that New York City
mentality where we consistently operate under like a 1 to 2%,
you know, vacancy. And it's kind of like, hey, you
earn the privilege to rent this unit, right?
Like once I go out of New York, I'm like, all right, Bill Lloyd,
like, like, like they're. Actually like if you're in
Atlanta, right, If you're in Atlanta or Dallas and all this
new stuff or Austin and all this new stuff is hitting the market,
like you gotta have a facelift in some your units to attract
tenants. Well, that's why we pay a lot of
attention. And I remember going on the
ground tour with my two of my analysts and I was like
explaining to them, I'm like, you want to own things, you want
to own real estate that are where the neighborhood is the
amenity, right? Like you want to own real
estate, what the neighborhood is the amenity, not the actual
amenity in your building that actually do experience
depreciation over time and do experience obsolescence risk.
And, and this is where if you're in certain cool parts of
Brooklyn, right? The neighborhood is what's cool,
right? And you could kind of have like
some rundown unit and it was still rent for a large premium
because people want to be in that neighborhood.
And there are certain characteristics where it's not
the cool and hipness of that neighborhood, it's the fact
that, you know, in the neighborhood in the area like
Downtown Brooklyn, there's six subway stations that are all
expresses that get you in into the city.
And also what you go east in the further out to Brooklyn.
It's just a great transport like logistics hub where someone you
know, people may want to live there just some close with the
ease of commute. And those are kind of like
permanent. Those that kind of vantage don't
go away and that's where you don't have to spend this much on
amenity. And you know, you can also like
go further down like once you get into kind of like a lot of
that Class B asset class where you get into workforce housing,
the tenants like are not as discerning when it comes to,
hey, you know, what is your kind of kitchen bathroom, kind of a
many package, right? Or like, is there a grill in the
rooftop? You know he would just want to
save clean place to live and that's what they want.
So so you got to pick your battle.
But I totally agree with you why on this On the extreme high end
for condos you definitely need the best Amelia package to
compete. Yeah, and some apartments.
But yeah, dude, I was listening to our last podcast and I can't
believe. I mean part of the issue with
trying to facilitate a conversation while also having
one is I try to listen as well as I can, but sometimes stuff
slips by me. I didn't realize, and I do not
own this so I can say this in an unbiased nature.
I didn't realize the aggregates part of the FRPH pitch.
Yeah, OK. And and when you were saying
about, I think you were talking about like how blue the water is
or something like when they, so basically they can mine the
rock, right? And then they sell the
aggregates and then they're developing communities in the
old like, basically mind. Yeah, that's that is pretty
freaking cool. I didn't pick up on how cool
that was. I was trying to like, kind of
push back on you about what I thought people might pay and you
were well, I mean, this is what they're paying.
So it's obviously desirable. It reminds me of you know, about
Stream song, the golf course in on the West Coast here in
Florida. I don't know why you would, but
if but like so mosaic. I think it was mosaic.
I'm almost certain it was. Mosaic is a.
Potassium. It's it's, I think it's, I think
it's potash. It might be phosphate.
That's yeah, it might be phosphate.
That's in Florida anyway. So they were mining this area,
and in order to show what could be done with an old mine, they
said, OK, you know what, we will.
We'll develop it into a golf course.
And it turned into, like, a very, very cool golf course that
they owned. Now, the financials on it, you
know, weren't great, but that's completely different.
There you go. They just sold it.
Yeah, 2023. Let's see what they sold it for.
But yeah, anyway, stream song. Stream song OK.
Yeah, and it was super cool like that they did that.
So it kind of reminds me a little bit of what you were
talking about. And I just, you know, I just
couldn't hear it. Yeah, they sold it for 160
million. Probably cost more to do, but I
don't know, whatever. Yeah.
Yeah, it was neat. I'm.
I'm looking at the photos. This looks really awesome.
Do you know what's what's odd about it out there is there's
like a ton of, there's a ton of alligators.
I don't know how they got out there, but like there's a lot in
some of those waters. So if anybody's out there
playing and you hit your ball in there between them and the water
moccasins, I would not go for your ball.
That's my $0.02. It's not worth I was talking to
someone about the that their Fort Myers and I was talking
about, you know, the water being blue and whatnot and somewhat
gently reminded of me that in Florida, you don't you don't go
into the water because you just have to, you have to assume that
there are Gators in there. And I'm like.
Yeah, though I mean, the freshwater in Florida, there's
probably smarter things than to swim in.
I did as a kid. In retrospect, I'm not sure that
wasn't smart, but whatever. Some of it was.
But yeah, I was on a of course the other day and look down into
the water and there was a water moccasin and people always say
like if you can see a ball do not reach in and get it cuz they
hide like under the wood and under the rocks and you know
those things bite you and it's all over but the crying.
What is a water moccasin I have to add?
It's like a little, it was like a little black snake with some
yellow lines on it. It didn't look like the kind of
thing that could kill you, but it 100% can kill you.
Yeah, real Florida wildlife shit.
You ever think about, I always think about Australia as like
the yeah, where it's just like everything there could kind of
kill you. I'm sorry for Toby, Right?
Like. Yeah, 100%.
Yeah and yeah. You don't want anything to do
with that. That's a different.
Yeah, no, it's craziness. Yeah, even I think like even the
platypus, like if you get bit or sting by them, there's like
venom in this platypus. I'm like, OK, like that.
I was, you know, you know, about the blue ring octopus, the box
jellyfish and all this. And I'm just like, I'm not sure
what it looks like. Such a cool place to visit.
But then the more I learned about it, I'm like, it's a
little scary. It's amazing.
I backpacked through it when I was young and and it was truly
an incredible experience. But yes, I figure if the
wildlife can survive out there, they can kill me.
Yeah. Yeah, by the way, too.
It was fun, man. Yeah.
I jumped out of a plane at Rainbow Beach, came out and you
see, like all this, this, the sand was a bunch of different
colors. Byron Bay is like my favorite
place on Earth. If I could retire anywhere, it
would be Byron Bay. I.
See. We have diverted the
conversation. Well, I mean, we were still
talking about real estate, right?
In a way. We're talking about different
geographies. We're talking about second, you
know. Location location.
Exactly location and useful Second life.
You know the thing about Florida that keeps Amaze amazing me is
that years ago I was investing in a company that own a good
chunk of Daytona right now that really is called CTOCTO Realty.
I think Florida is the only market where I am aware of.
But you know up here in the Northeast, particularly in the
New York City area like the neighborhood it is really
important right like you buy a house in the neighborhood and
then you that neighborhood over time how that trends matters a
lot. But Florida is like one of those
markets where sometimes like, like I remember going out to
Daytona and the I-95 kind of like bifurcates, right, The site
on you know, E ESO I-95 and the house, you'll get the Daytona
Beach right on the water. And then like a little bit in
between that, the ocean and I-95 like is kind of this no man's
land where houses were going for fifty $70,000 each, right?
And a lot of them have like storm damage at the time, like a
lot of Roosters have parks over it.
And I'm just kind of thinking I'm like, I thousands was
$70,000 a year, like what is going on over here?
So I automatically assume that if you go further inland West of
I-95, you know those land, the lots probably are worth 5 to 10
grand each, right? And that's like kind of logical
thinking. But guess what?
They sold the land to Margaritaville.
And then what? Florida's one of those areas
where if you could get your hands on a large track away, you
could kind of build your own community.
So yeah. So the houses the new builds in
Mark Greenville sells for half $1,000,000 like that, that like
from someone who learned a lot about real estate in the
Northeast, like to see that that that blew my mind.
That was. Like, very you also to your
point, you also can't just say, OK, well, this is a mile from
the water. And therefore it's valuable
because mile is like a big difference.
Maybe a mile is too short of a difference.
But like, you do really have a no man's land between the
intercoastal and I-95 in most spots in Florida.
Mm, hmm. Mm, hmm.
Mm, hmm, mm, hmm. Yeah.
And then and then you got like, you know, there's the like
Daytona. Yeah.
Unfortunately they built all those high rises on the water,
right, like along the ocean. If they didn't.
But it does have some I think Daytona offers some value.
I mean, you know, South Florida, it's great.
What the thing about that shocks me and I'm sure YouTube would
tell me that everything's crashing and I don't necessarily
think it's wrong. But dude, the resiliency of
people to just absorb insurance costs going up here or they're
just saying whatever will go X wind.
But you know, the insurance costs a real problem here, which
I gather maybe it's starting to get addressed, but.
Yeah. Yeah, it used to be that you
could assign your claim to somebody else for up to like
five years and then they could sue on your behalf and it just
caused the insurance to go way high.
The climate risk change this is a topic where I have my annals
and I have a very intense debate on and it gets like, you know
you're doing something right when you and your team have a
debate on a topic it and it gets like really it it gets a little
heated right, because you're like really trying to suss out
right like the the. Articulating both view points.
Yeah, your both view points sometimes like I'm like you
really got to pay attention to the fact that like people,
there's a lot of population growth, while you have a lot of
inflation, you have people voluntarily moving to areas
with, you know, more that are more prone to climate risk,
right. Like up here again, I keep going
back to like up here in New York, like, you know, we get a
bad winter storm every once in a while.
Sandy in 2012 was probably the worst, like hurricane flooding
that we experienced, right. For the most part, we don't get
a ton of crazy climate. And then if you look at where
all the net migrations, it's to Florida, it's to Texas closer to
Gulf that are more subject to you up to hail to hurricanes.
So as topic of like climate change there that's, you know,
the insurers have like fully priced them in.
That's something that my analysts and I will could have
like a three out of the you know, argument on.
I'm kind of like rambling a little bit because I'm just kind
of like rehashing, you know, what we talked about internally
here at Rizal. And one of the things that like
I've been hearing about it is there's this theory that every
time like, like you mentioned that like people will say, oh,
that house have like another hurricane left in it, right?
And then like once that house gets destroyed, it gets rebuilt.
It has to be like rebuilt if you're certain cold and and then
like your housing stock is more hurricane resilient right over
time. Yeah, quite a bit.
So not to water, but to wind for sure.
I mean, the thing I learned when I got hit by a tornado is, you
know, the issue too is not my house is built in to code that
can withstand whatever. The question is, are my
neighbors houses? Because a couple of the houses
didn't have a storm left in them and their roofs hit our roofs.
And your roof is not impervious from a Truss hitting a roof,
right? I mean, the house may not get
totaled, but I mean, we absorb some damage.
And I mean I know a guy like 7 houses down, brand new house is
I mean a roof went through his roof.
Wow. So like, he had to replace his
whole roof now that his house was OK because it hit the garage
and it's not like water came in, but like, makes you think about
some things. That is definitely the first
time I've heard the term a roof went through a.
Roof. First time I thought I'd say I I
didn't even think it was a possibility.
The Tornadoes are no joke. Yeah, wow.
There was a roof Truss that was, I mean, I don't know, it must
have been thrown 400 yards. Wow, it was wild.
Like a big ass. Roof Truss.
Wow. So that's when.
I nature wins. That's what I learned.
If you ever like, think you can beat nature, ocean, tornado, any
of that stuff, you can't. No, no, you, you.
Best to avoid those situations. Yeah, yeah.
You want to talk about Alexander's at all?
No is a fine answer. But I think it's kind of one of
the more interesting ideas that you and I have talked about over
the past year. And I happen to think it's if
you're going into a recession, there aren't a whole lot of
tenants that are better than Mike Bloomberg.
Yes. So Alexander's is a, well, Alex
is a wreath that's that owns a Bloomberg building in New York
City and they have a triple net lease that runs to 2040.
So that's 15 years. And there are these really nice
annual escalators in that lease. It kind of like every five
years, what it kind of works out to like 2.8% annual escalation.
And it's a true triple net lease where the expenses, you know,
Bloomberg, the tenant absorbs all the expense increases and
you're truly getting like inflation kind of protected on
Bloomberg as a tenant really. And that runs to 20/20/40.
And also owns a multi family out in Queens in a place called
Regal Park. It owns a shopping center out in
right next to it on the bottom that that has a Costco, which is
probably the most intense Costco that I've ever been to.
I'm talking about like, get ready to throw some elbows.
That's quite a statement. The most intense Costco is kind
of a scary place to think about. Speaking.
Which that's not. Speaking with someone.
Sounds like you need to take a Valium before you go there.
Speaking, which someone did, did challenge me to a fight like and
the cashiers flying a few years back and I've kind of like.
Doesn't shock me man, people get crazy.
Kind of like what are we doing here?
So now the downside of this whole thing is they have a
relationship with Vornado that theoretically could be a
misallocation of interests, right?
Or adverse incentives. Is that fair to say?
I think that's what it would appear at first glance.
But I think that I think that based on 4 decades of what's
important is that Fornado owns 32 or 33% of the shares of
Alexander, right? So this should be kind of
thought as like a public sub of of Fornado.
But Steven Roth and you know, Interstate and Steven Roth and
some of the major shareholders, Alexander, they own a lot more
of Alexander then they own for NATO.
So I would say that your interests like Stephen Roth, the
CEO of Ornado is actually more like you got better protection,
get more alignment of interest because he owns more of
Alexander than he owns of Ornado.
And there was always like a persistent fear that, you know,
for NATO in a market downturn, the moment like COVID will try
to do a take under of Alexander's.
My argument is kind of, hey, you know, we've experienced the GFC,
we've experienced COVID. If there was like a time for
Vornado to optimistically take this under and acquire this
company, they probably would have done it, you know, a long
time ago. And there's actually a really
interesting Trump connection to this company.
Back in the 80s, you know, Donald Trump actually owned a
good check of a company, I believe 20%.
And then, you know, Stephen Roth was the other big shareholder.
It was a department store that owned a lot of real estate,
including a whole city block where the Bloomer Tower is
today. And of course, Donald Trump, you
know, famous, we filed for bankruptcy in the early 90s and
then and then Stephen Brock took control of this complete.
So Alexander has a very impressive corporate history
where if you start kind of like you think about Sears and Macy's
and all these department stores that own a lot of real estate,
this is an example of a department store asset value
play that actually succeeded. And it's so successful that it's
roughly A-47 bagger total return from 1992 when Stephen Roth took
control of Alexander. What they've done over time is
that it's really important to like understand the corporate
history because I think at first glance people could say all this
misalignment interest, you run the risk of this being taken
under. If anything, what they've done
is that in I think like 2012 or 2013 might have been 2011
sometime there over a decade ago, they sold a shopping center
to to one of the more reads for $750 million and paid out a
special dividend that was like $122.
And the stock today is around 200 bucks, right?
So there's a corporate history of Stephen Roth and Copley not
abusing this kind of you know, public sub relationship.
You know, if you look at the matching fees that they charge
to each other, it's very fair. But I think generally it's been
managed very well in my opinion. And there has been a long
corporate history of them selling kind of non core assets
and we paying out special dividends, returning it to
shareholders. So, so you know that there was
122 dollars special dividend in over a decade ago.
More recently they sold a development parcel next to that
Costco for I believe $73 million.
And then more recently there were two shopping centers in
Regal Park. There's Regal 1, which you know
is a much older David 70 year old shopping center.
And the Regal 2 was built in 2009.
And what they've done is that they strategically, they try to
make both shopping centers work and Regal 1.
Frankly, there's just like too much retail, right?
With a trend of like e-commerce and whatnot, there's just like
too much retail. They don't need Regal one, just
not competitive enough. They actually got a really good
tenant, IKEA in there in their urban concept and that didn't
work. So they should teach.
We decided to essentially move all the tenant from Regal 1 to
Regal 2. Now Regal 2 is 9798%, you know,
occupied. It's got a tenner roster of, you
know, Burlington and I believe by the Marshalls of TJ Maxx with
Costco. Marshalls.
Yeah. You got Costco, Kohl's, Best
Buy, Marshalls in Burlington is what's listed in the 10K.
And then you got, you know, on the ground floor, your Chipotle,
your restaurant concepts. It's got a really nice roster.
And it's also very important that this is located all this is
located it right, You know, such you right next to the subway
station in Regal Park. There's just a ton of density
around, you know, both of the shopping centers.
And they're one of those few exceptions that have between the
two shopping centers. They have 2005, roughly 2500
parking lots and clinks. When you think about this, what
has happened is that they have two shopping centers that were
kind of competing each other for business and they decide
strategic, which is shut down Regal 1 and stop, you know,
utilizing it as a retail center. Now you just kind of like
combined, they used to be roughly 1,000,000 square foot of
space. You essentially move like third,
you know, 1/3 of that space and that so, so it's like how much
is Regal 1 worth? Regal 1 is 5 acres that sits on
top of a subway station in Queens where they could
probably, we don't know the exact zoning, but probably think
they could probably built 15 stories on it.
And we've estimated by our math a range of 150 million to $200
million of value, right. So this is an asset that is
likely losing money, have negative NOI, but actually is
worth, you know, somewhere between 150 to $200 million as a
residential development 5 acres right above subway station.
And a politically we talk about how tough it is to get zoning
politically. Like if this one person who
could like get the city to kind of zone to kind of their will,
it's probably Stephen Rothman tornado New York City.
So this is an asset that's probably losing 5 billion a year
because of private taxes and just expenses that's worth like
150 to $200 million that that the markets like totally
overlooking. This is what like what kind of
bothers me sometime is that like, like it wasn't that long
ago when doctors and lawyers were buying triple net lease CD
s s and they were buying them for like 4% cap rate, 5% cap
rate. And here you could kind of buy
probably one of the best assets with the 15 year, you know,
really 14 because there's like one year free rent.
You know, like you got Bloomberg as your tenant.
It's a true triple net lease, right?
One of the best credits. And to kind of what you were
saying, if we are going into this recessionary environment,
you probably want Bloomberg as your tenant.
And also like people sometimes have, what if I, Bloomberg
decide to leave that this is, you know, just so that everybody
know, this is the Bloomberg headquarter where they tape some
of the Bloomberg TV shows. So this is not some satellite
office. This is their global
headquarters where it, if they got to cut office space
somewhere else, they'll probably cut it elsewhere in satellite.
They'll probably consolidate spaces into this global
headquarter. And Bloomberg just came out like
whether like you think is office, you know, how office is
going to fare. Like at this point, it's really
a corporate bond of Bloomberg. And today, you could probably
buy this at just under 9% dividend yield.
They have $400 million of cash on the balance sheet and which
is called like roughly like 40% of the market cap.
Now they do have some mortgages that are coming due that they'll
use that cash to pay down some of those mortgages, but just the
future Rep payment net of expenses is like 30% higher than
like the market cap. And then you make all these
adjustments and you're also getting paid 9% to kind of wait,
right? And then if they sell Regal one,
there could possibly be a, you know, they may pay out a special
dividend. And in a weird, bizarre way, the
stock is also like got like 9 days or short interest in it.
Like I don't know why anyone will want to short the stock,
but I think that, you know, they're paying a 9% annual carry
to short the stock and then if they sell Regal 1400 fifty $200
million and payout special dividend because they have to do
the re tax laws. Like that's not a pleasant
experience for the short sellers.
We certainly like Alexander, you know, for the fundamentals, for
the current dividend yield, for the asset quality that they have
and also for like this short term dynamic of like, you know,
the short sellers like wanting to short this and then the
potentially could be, you know, a special dividend from the
asset sale where they may realize a decent chuckle capital
gain and then they have to pay that out in a special dividend.
Does a REIT like this ever partake in its own?
Would they ever JV with somebody to keep Rego One and let that
person develop it or does it just make more sense to just
sell it, get it off the books and distribute the cash?
It does make sense to you JV it and then where you know they'll
just contribute the land and then they'll contribute the land
and they won't put up any more equity capital or they'll just
put up a small amount of equity capital and the other JV partner
is responsible. So that does make sense.
But on the on the Ernie's call, in the Ernie's call, Stephen
Roth, the CEO of NEDO said that he who like to sell off what
like you painted it this utopian vision where everything gets
sold off leading just behind the Bloomberg building with like a,
you know, by the time that done probably a 1213 year, you know,
lease term on the Bloomberg building.
And you know, depending on who you ask, I think some of the
reach specific investors are, you know, like we like some
diverse diversification, but then like there's probably a lot
of doctors and lawyers out there who would love to own that,
right? Who you're like, oh, you got a
single asset and Bloomberg is your tenant and there's like no
other headaches like that could be very, very attractive to your
retail shareholder base. Yeah.
Yeah, I don't know.
It was interesting. It was interesting to listen to
the earnings call when he was basically like, look, this
thing's too cheap and we're going to do something about it.
Yeah, yeah. No, I think that's when you
pinged me. I think you were like, I know
that you I've talked to you about Alexander's before.
You should listen to this earnings call.
And then I was like, yeah, yeah, he does seem motivated.
Yeah. I mean it is flat out coming out
and say this is very cheap and we got to do something about
that. Yeah.
So why is it cheap?
Like what's the real bear argument here that what, 53% of
the revenues from Bloomberg and it's office and you don't want
that? Is that like the most valid
pushback? I think the bears probably
looking at it and thinking you, you got this like so they have
$400 million of cash and they have I think like roughly 1/2 a
billion dollars of maturity this year, right?
And I meant there's like that Costco shopping center that's
got tremendous amount of value that's worth $400 million.
It's got 200 roughly $200 million of mortgages on it,
right. So I think the bear is kind of
thinking, OK, you know, the dividends like not sustainable,
they're going to have to cut that.
And then the mortgages, right, The mortgages that there's like
near term, you know, mortgage maturity.
And then I'm kind of thinking, well, so one thing that that
listeners should know is that they're paying a $18.00 per
share dividend, like what they could potentially sustainably
pay right now probably is in that $1314.00 range.
But Bill and I have talked in my perception is that, well, they
know they got asset sales in the pipeline.
So they'll probably keep the payout at that amount.
And then they may potentially even pay like the special
dividend when they sell Regal. What?
And then I think the bear is kind of thinking like like a lot
of times the bit the bears are thinking, OK, if you got near
term mortgage maturity and you got like kind of you know, a
payout ratios that above 100%, like that's a pretty good setup
for short, right? Yeah, your chase goes higher and
if it's retail that owns that, your dividend yield goes down.
Yeah, I could see that. Yeah.
But then I don't think so. I don't think like they really
kind of look at the Regal 1 as an asset and how that's actually
from a dividend coverage ratio perspective that it's, it's
actually have negative contribution.
It's got negative contribution, but it's worth a ton of money,
right? And and I don't think like the
bear. The other reason why this is
kind of unfollow is that it doesn't have its own earnings
call. It doesn't have its own earnings
call. It doesn't breakout performance
at the asset level. So you kind of have to, I mean
that's kind of what our clients pay us to do, right?
Our clients pay us because we could kind of scrub it, we could
go do that extra work. And to a certain extent like we
have the advantage because we're local and we know these assets
pretty well, kind of like when we did the Vornado walk in New
York City, right? Like that is like a local
advantage to to know these assets, you know, just by me
being there and getting challenged to a fight by another
customer there, like, like knowing how busy that center is,
like, like that's an edge, you know, that's on the edge in
investing and. So, yeah, to your point, it's
one thing when you hear on the earnings call, these are on the
corner of Main and Main. Yeah, that's one thing.
And then you're like, well, of course he's going to say that.
Who's going to say I own, you know, a shopping center that's
basically like dilapidated at the corner of, you know, AC
class, right? So, so yeah, to be able to go
there and say no, this is actually true.
Is yeah, yeah, it's different. And we know like, like my family
on the private side, we looked at a lot of, you know, my
younger brother, look at a lot of private deals.
I mean, we don't have the capability to take down
something of this size, but we're constantly like my younger
brother's constantly getting pen to look at private deals being
shop in the market. So we're, you know, we're very
conscious of how much, you know, these assets go for and what a
developer will pay for on a press square foot basis.
You know, in the even in this environment, I mean, we know
that there's an asset across the street from Regal one that
they're asking, I believe by 70 or $80 million and it
essentially works essentially work out to what two $300.00 per
square foot buildable, right? So like we're very like in the
weeds in this one. And there's also a trend of on
Queens Blvd. where this these assets sit, there's a trend of
low rise retail being knocked down to build these high rise
residential. It's like part of the
densification, right? It's like, why do I feel
comfortable owning that retail there?
It's because by by the way, this is the Queens Blvd. like
literally about a mile down. Remember coming to America at
the movie with Eddie, Eddie Murphy, right, So that McDougal,
whatever it was called, right, The burger choke that was filmed
in Queens about a mile down, right?
And that burger joint has now has been knocked down and they
built like 7 like it's been built like Max to the curb line,
right? Like it doesn't have a parking
lot anymore. So like like a burger joint with
a drive through and everything has been knocked down to be
developed into like a seven O 8 story residential.
That's like built fully to a lot, right?
Like that's just like something, you know, so that people can
understand, like retail spaces keep being convert it into
denser high rise residential in that area.
So again, one of the best like the scarcity mindset, right?
One of the best mindset. They like what are best mental
models for investing in real estate is that we see in the
asset class where over time there's less and less of it.
That's usually like a pretty good asset class to own, right?
And this is like the bold pieces for.
Like capital cycle theory. Yeah.
What I mean like it could be it's not just capital cycle,
right? There's like a secular decline
in your supply, right? Like.
Well, the reason that I equated it is I attribute the secular
decline to money coming out of an industry, right, as opposed
to coming in, which would add supply, supply, supply.
Yeah. So overall on Alexander, like
you know, roughly high eights, low 9 dividend yield with like
possible like an asset sale in the next like year for Regal 1.
And then you get to own the Bloomberg building with a 15
year triple net lease on it. If they sell that shopping
center, they sell that apartment building, you could potentially
get like additional special dividends and like we kind of
model it like you could buy for 200 to two O 5 today.
And in our model, like our NAV is like caught like 3:50 and
you're collecting this dividend the whole time.
And then there's like a bowl case where if they sell all the
assets, just leaving the Bloomberg building at some
point, like between like special dividends and rent escalation in
the Bloomberg book, because that lease is really interesting,
right? They agree to that lease in the
Bloomberg building last, you know, last year I believe.
And at the time like Class A office rent is uncertain in New
York City. So they have a a set of range
and the range is between like $87.00 triple net to like one O
4 right. And if you believe what for NATO
was saying that Class A office space is actually trending lower
in New York City because the Class B and Class C is what
people don't want. But everyone wants Class A if
the boomer at least, you know, gets reshark at that $104.00
triple net price like this, you could get to a map of, you know,
over 400 to to the mid force. It's just like current dividend,
really high quality asset at, you know, a historical 47
bagger. And then like if you own it, you
tell your friends that that you know, POTUS, right?
You know, like whether you're like like regardless of like you
know, where you fall on the political spectrum.
Like, like, it's like interesting cocktail hour
conversation, right? Yeah.
Well, to the extent that there's
a lot of turmoil in the Treasury market, I would argue that the
underlying cash flows to Bloomberg are more sticky.
So that makes them a little bit more likely to pay.
It'll be interesting to watch, but I kind of like that idea, so
thank you for introducing it to me.
Yeah, no problem. I mean, you know, we're also
just finding a probably the busiest in terms of like event
driven in the RE space. Like this is probably the
busiest I've been. So like last year we had retail
opportunity Investment Corp got bought out by Blackstone.
That was a meaningful position for us.
And then we have what do you call it, a Playa, which was
bought out by Hyatt. And then this year, you know,
between ankle, which has been in the orderly liquidation for
quite some time, you know, dream residential Elm community and
let these office property like you're starting to find, like if
you look at the early Buffett partnership, where Buffett used
to be a lot of venture event liquidations like this is like,
you know, he was doing more merger arms and there was like a
definitive price when merger arm was like a really awesome way to
earn 20% a year. Like what we're kind of finding
this year is there's a lot of these a lot of these REITs that
are smaller and kind of orphan. They're like voluntarily
announcing to go, you know, to export strategic alternative,
right? So so here's like a perfect
example like I don't think. Why is that interest rates going
up and you got a compliance costs and they're just kind of
sub scale to be public or? Yeah.
I mean, I think for the most part, when they realize that the
subscale, there's no real possibility of them becoming
like a $3 billion REIT get $200 million market cap today.
And to get to 2 three billion where you're truly liquid and
really trading like a blue chip beat and just can't see like a
line of sight to that. And there's like not a lot that
they could do to create a lot of value, right?
Like if you're just sitting there clipping coupons on like a
$200 million Reed it it's going to take a lot of years to grow
into something that's a $3 billion.
So so, you know, dream residential is Canadian Reed,
you know, very liquid. They came out at you know, I
have a few friends who told me that that's cheap and I didn't
pay a lot of attention to it because I'm like, I could buy
virus, which is very high quality Jersey City multi family
at around a 6% cap rate. I could buy like the large cap,
the mid America and the Camden's.
And I'm like, I don't want to get stuck in a tiny $150 million
market cap re up in Canada that what barely trades right.
But that changed when they came out and they announced Strategic
alternative and they said that they're going to explore
Strategic Alternative. And then they went out and hired
TD Security as a financial advisor.
And so the valuation is, and This is why sometimes I keep
getting, I'm just like, this is the private price and then this
is a public price. So even after they announce
Strategic Alternative, we were still buying in the high 8 cap
rate for like a portfolio Class B multifamily in Dallas, Fort
Worth, Oklahoma City and Cincinnati.
And by the way, through Twitter, we were able to like reach out
to a few people and we haunted down the broker who actually
sold the Oklahoma City assets to this reef.
So they told us like everything, right?
They told us they're like, this is a vintage.
This is like, you know how their position in the sub market, This
is what I think, you know, the cap rate are for each individual
asset. And we looked at it, we're like,
how do you lose money buying multi family?
Granted it's Class B. These are older garden style
apartment buildings at 8 1/2 percent cap rate and they're
running a real process. I mean this, you know, running a
real process. And the company probably states
that the NAV is $13 using like a 5859 cap rate.
That's kind of like a bowl case. You know, that's like a boat
like Uber Bowl case for us. Like if they could get back on
pricing, we got to be really happy, right?
So we were behind like in the look like high sevens, low $8
range, which corresponds to like a mid 8 to high 8 cap rate.
And we're going to see what they'll do the next year in
terms of like running the process, but like we kind of
like on the road to somewhere between like a 40 to 60% total
return on, you know, buy multifamily, you know, in the
mid to high 8% cap rate. That's an example of like what's
available in a market like today where you talk to any of your
private guys and they're like, wait, like you tell me, I could
like buy a portfolio at a A5 cap rate and I could flip it for
somewhere between like a six and a 6 1/2 percent, like within a
year, every single one of would do that trade, right?
So I think that's like gone really interesting and you know
a company like Aimco which we did a lot of work on that's
probably going to get sold for like with the full liquidations
probably somewhere between 11 to $12.00 range and that's traded
below $8 today, right. So, so kind of like when you
think through back to like Buffett's early partnership
where he was doing a lot of vet driven and workouts, we're
seeing, we're seeing a lot of that right now.
Our own community, which used to be known as Washington Reed.
They owe mostly multi family and I think, you know, it's kind of
run its course. They try to be a public Reed for
years and it really create a lot of shareholder value.
And they've come out and probably announced that
exploring should teach you alternative.
And this is a heck of environment.
This is a heck of environment for kind of our active strategy
because we could do these event trivia, we do these workouts, we
could we could buy large cap blue chips, Class A self storage
and warehouses in that mid 6 to 7% range we want by extremely
high quality Jersey City multifamily, which are all high
rises, high barrier to entry. At almost a 6% cap rate, keep
underwriting a lot of these names and especially after all
the Trump terror drama, like like we're just we're just
seeing like what we've been underwriting a lot to over 20%
IR and that's usually a sign telling us that I'm not saying
like that's exactly what we're going to earn on them.
There's no guarantees investing. I really want to watch put that
out there. But when you do your research
and underwriting, like there has to be a certain return level
where you say this is a very at Target rich environment.
I think the last time was this target rich was probably in late
23 when we did our first podcast together, right?
And yeah, and I've been something even like a Seaport
entertainment, which, you know. Yeah, that I don't know, I don't
understand that one that well, but it's that has not traded
well since the spin. Yeah, yeah, that is I'm.
Not saying any partners with your boy.
What's that? Then your partners with your
boy. Who?
Who you referring to? Well, I don't, I don't really
want to name him on the pod, but didn't he backstop the rights
offering? Oh, well, I mean, yeah, OK, yes,
he did. He he he did, he did backstop
the rights offering. I mean, heck, like if you I'll,
I'll, I'll stay out of the, you know, the Jaro, right?
You know, he's got a new political career, but.
Well, you've been right to to question whether or not minority
shareholders and Howard Hughes were going to see the benefits
of the asset value there, right. I mean that that is a
transaction that I don't think made a lot of people or a
proposed transaction that I don't think made a lot of people
happy. Yeah, yeah.
No, it's unfortunate. You're back in a similar saddle.
Yeah, no, I mean, there's definitely yes.
And he's got equal amount of ownership in Seaport as Howard
Hughes. You know what I don't understand
about that transaction? I do understand wanting to have
like a clean asset story to tell.
But, and this is maybe just me not understanding what's going
on, but the minor league stadium that was in, you know, I feel
like that should have stayed part of Howard Hughes.
Yeah. Because I think that the
incentives, like having a reasonably priced entertainment
option for the community that you live in, yeah, is a nice
thing. And maybe, you know, having the
incentives to have that thing run for profit, I think it
actually detract from the asset value that you're providing to
the community around you. No, I I agree and I.
Not everything has to be optimized for the most profit
possible. Yes, yes.
No, totally. It is and.
Sometimes I think full blown optimization can end up actually
taking value away from the aggregate.
No, you're totally right, right? And I thought a lot about this,
right? Like how much value does it add?
Like in Brooklyn when you get a really nice coffee shop that
makes great artisanal coffee, right?
Like you as a landlord, it's always busy.
It's always a very reasonable price.
And just like the five, like this is where if you have
control over a whole entire area, like your incentive is not
to maximize rent that you could charge on any specific retail
tenant, right? It's like curating curating the
best tenant that experience is. Yeah, the living experience.
Yes, the living experience, the live work play experience of
like a certain massive point community.
I would say that you don't. I totally agree with you.
It's like don't make money. You don't have to make money on
the minor league, you know, team.
It's like making that a cheap option, right?
So that the families want to live there.
It becomes like a entertainment option, like like there's
tremendous. Amount then you get to bump the
value of your lot because all of a sudden it's like actually a
really family friendly place and like the value of the lots, I
think is where a lot of the value is here.
It's not like I don't know, that's my opinion.
Well, I would argue that the value of the lot, right?
And then in the long run, as the lot sells off, what it does is
that now you got more density. So I put 30 days, like I put
boots on the ground over 30 days on Howard Hughes, right?
Like, like it is one of the most exhausting company for me to own
in My Portfolio. Like over the course of my four
or five years, like we've been out to Honolulu, we've been out
to Summerland Vegas like 3 times I think.
Sounds awful. What's that?
It sounds awful. I had to go to Hawaii and Texas
and Vegas. It was.
I can see why it's been exhausting.
Well, I wasn't talking about the trip.
I was talking about the exhausting in terms of in the.
Course of no, the amount of work you've done I.
Mean don't give me like, I love those boots on the ground trips,
experiences. What was exhausting was the
ownership experience where, you know, we own it over like a full
five year holding period and you have COVID in the middle.
You have the Oh yeah, you know, the equity offering, right?
You think that you were investing with somebody who's
aligning with you. You're like, I'm going to be
patient. This is a long term compounder.
And then at a certain point you realize that it it's kind of
like I'm in I'm married. I've been married for a long
time now. It's kind of like when you're
younger, you're dating and you're like, oh, this is a girl
that are going to marry and at some point you're like, oh, I
can't trust her, right. Yeah.
And that kind of like shatters. Yeah.
And that kind of shatters your world.
Luckily, that's not a problem we're going to deal with
anymore. That was a long time ago.
But that's a kind of like when you give a company your trust
and you say, I'm going to be patient.
I'm going to be patient with an Amazon like and you go in with
that mentality and then you realize that, hey, they that is
not how they view you. He who shall not be named, you
know, is going to like take advantage of you right at every
turn. And you know what, like, I am
very glad look like I, I'm very proud of what my team and I have
done because that is like the first instance of like Twitter
activism that we ever engage in. Like I, I don't know if you
remember this, but like there was a, there was a tendering
for, you know, shares at 60 and then we said like it was cheap.
And then, you know, very few people tender.
And then there was a tendering at 70.
Like I did the math like like we course, you know, he who shall
not be named, you know, 60 with $65 billion, like to bring his
ownership from from 30% to 38%. And we defended our position.
So, so like I've never gone activists on any company, but
like that was probably like the first instance of us like using,
you know, Twitter activism to like defend our position.
So, given all that, what's so intriguing about Seaport?
There's a couple things that make it super interesting.
It truly has a potential to have a lot of upside, but I'm not
willing to like size it big. OK, and because like if you
think about like if they are successful in repositioning this
company, it has like the potential to be a multi bagger,
right? So that in how we makes it
interesting. Now I think a lot of patient is
needed. I think I I track that the
seaport and the historic area and how they manage.
I think that behaviorally there was a time period when what you
had was there was a lot of like internal fighting between Howard
Hughes and some of the board members, unlike how they want to
position the seaport and the historic area.
I think there was a vision to turn it into this like super
high end glitzy area like tank Korsukuomo, which is this like
really cool club in Milan, right?
And I think they went with like a luxury premium, you know,
strategy that clearly did not work right.
But they spent a billion dollars on that asset.
So mentally there's this suck cost fallacy that the management
team have. And then also I think like there
it also suffer from the fact that most of the business, I
have this theory that when you own a MPC and you have
incredible control in markets like The Woodlands in, in, in
some way where in, in Hawaii and Waikiki in the Hawaii war
Village where you're the zoning board, you're the developer and
you are like, you know, kind of like the monopoly owner like of
that area. I think that management team,
they kind of were used to operate in a certain way and
then they try to develop and built in a market where it is
the complete opposite, right? Like where the neighbors, the
residents will try to fight you every term, right?
So what culturally, I just think that they have the one type of
mentality of people trying to make that asset work, right?
And so I think that was a challenge, right?
I think they positioned it to high end to luxury.
And then there's a suck cost fallacy of we spend a billion
dollars in it, right? Like we can't bring a Dave and
Buster or a a Meow Wolf, right? So think about this way, right?
Mentally, if you spend a billion dollars, you like the only
tenant that we could put in these offices has to be at ESPN
when Nike has got to pay us over $100 a square foot, right?
And I mean, to a certain extent, like they get they got unlucky,
right? Like COVID was not their fault,
right? But they got deeply impacted it.
And then like what happened with office would work from home.
Like they built that pure 17 structure to have a lot of
creative office, right? So it's a lot of factor.
Now a lot of that is behind us. By the way, I am not, you know,
saying people should go out and buy this like, like, like.
Well, no one should buy anything that they hear on a podcast,
period. So yes.
Yes, no, I mean, I mean there there's a very big difference
between like, I think this could have multi bagger upside, but we
need to like take a wait and see approach, right and it's like
it's like stalking, right, like you're like a big cat, you're
hunting game and you're just watching.
I'm just watching like we got a small starter position, but you
know, we don't have like a you know, we don't have like a
double digit position in this company, but I think that what's
important is now they're free, right.
So if you look at the announcement, if you look at the
announcement, they announced male wolf, which is like an
escape room, like a really cool, as my young analyst says, you
know, that's like a really cool escape room experience to take
like your hot date to right. I'm always interested in like
what my, you know, 2324 year old analyst has to say it about a
certain place or certain concept because because I admit like I'm
a, you know, I'm in my 40s. I got kids like like, I don't
know what's cool, what's hip anymore, right So.
You're hip, but not that hip. I'm like the use of the word hip
is not hip, by the way. OK, I'm like Costco leg day guy,
hip with like a Kirkland T-shirt and like shorts, right?
I'm hip in that way. I'm like post ironic hip, right?
And trust me, trust me, that's not a term that I came up with.
My analysts taught me that, right?
Like I'm by beyond, I'm by the most like boring generic, like,
you know, like Costco dad you can find.
But you know, I put my year on the ground that try to like, you
know, like try to stay up with what the young kids are doing.
So, so I think that what they did, one of the skills that I
think the previous management team didn't have is they come
from a real estate background, right?
This repositioning really needed like a food and beverage person
needed like someone who knows how to curate and put together
and they move quick. You know, they, they agree that
there's a new restaurant that, you know, that's up and running
in one of the spaces called Quitado.
I guess it's like a Tulu, Mexico concept.
They signed me a wolf that put in 250 Water St., which is A1
acre development site that they bought $480 million and put 10s
of $1,000,000 of what additional intangible cost in there.
So so that's out in the market that's being shop.
And then they own all these other assets such as the
baseball team, the stadium that it sits on air rights in Vegas.
And you know, I think that it's worth a starter position for me
to keep tracking to see what I will be watching for would be
how are they doing with the food and beverage offering?
Are they how are they are foot traffic improving?
And this is going to take time, right?
This is going to take time. And then one of the big factor
whether it's going to be successful or not would be when
male wolf gets billed out, which would take two years.
Is that actually successful? Does that actually succeed in
terms of right foot traffic? But I think by this summer, like
you know where we are, like I take my kids there a lot, take
the ferry, we go there, it's a nice way to spend a day there.
I did by this summer we kind of track like the concert lineup,
the programming and say a little bit about the new CEO, like the
former CEO is or the CEO of the parent, you know, Howard Hughes
company, he's a kind of like us. He was CFO, got promoted the
CEO, he has a lot of real estate experience, but you know, the
new CEO was managing, you know, VOI background tracks.
I think people were saying that he was responsible for like 1/4
billion of EBITDA in one of the Vegas, you know, casinos where
he was responsible for a lot of food and beverage like curation
and so like. Entertainment guy.
Yeah, he's a food and beverage entertainment guy, right?
And I think that if they make the seaport work, I don't know
if people know this, but like if you look at what retail rent,
what people could charge for retail rent in New York City,
some of those numbers will like absolutely blow people away
right now. That's a big if, right?
You kind of have to make the place cool.
You got to make the place, you know, you got to drive foot
traffic. I mean, at one point, Times
Square in New York City, and I'm not saying this is going to be a
Times Square, right? But at one point, Times Square
is a city. You know the Times Square was an
area full of prostitutes, pimps. And vagrants.
Yeah. Vagabonds.
Yes, and now they charge $2000 a square foot in rent.
Like, I must say the sequel is ever going to be able to charge
$2000 a square foot. But I'm saying that you're
starting with a really low basis.
And even though like everything that I've said, I'm still like,
I'm in stalking mode. And this is a really important
concept, right? Like Blackstone, a $4 billion
deal that was a company that I knew about and I was tracking
for 10 years. We never owned a position in
that company and then we made a 15% position last year.
What we try to do is that at times like we'll try to company
and then it will hit a certain price and we're like, OK, that's
you know, and we do like put the capital to work.
You got to go big, right, You got to go big and and you don't
like what it's kind of getting there.
It's kind of getting there for a lot of these names, right, like
pull out of these. I mean, like in when we had the
first podcast in late 23, some people to family as a fiend, you
know, it wasn't just one comfy, but you know, it's anywhere from
my kind of mid teens allocation to like up to 40% allocation in
different portfolios. So I I think that like if you're
a patient, you know what to be looking for.
And then like like Bunker said, you know, at times like what is
that phrase when it rains? Like, you know, like bring out
the bucket outside with a bucket.
Not a thimble. Yeah, not a thimble exactly.
But seaport is nowhere near there.
Right now, right. But like yeah, but I get it.
It's a transition property that you're watching makes.
Sense, Yeah, yeah, cool. And well, thank you for coming
on. Man, I know that we were going
to do it. What, 2 weeks ago?
But then the market exploded, so it required some more active
management than recording a podcast on that day.
Just a slight bit, you know it's a slight bit, but.
It it, you know, you know what I have to say it, this really,
this experience has really reaffirm like some, some of the
like conscious intentional decision that that I've made,
right, which is like kind of have to keep like like have a
tail risk hedging program, right?
Sometimes like I'll talk to other managers and they're like,
oh, like tail risk hedging. That's like negative EV, right?
And we're like, we're always like putting a kind of like a
50, you know, 50 bits to 1% per year and tail risk hedging.
And then I think like what it does is like, like you, you have
this muscle memory, you have this muscle memory, you know how
to do it. We could dial that up, dial that
down. And at a certain point before
the boration day, I got uncomfortable where I'm like, I
have to, right? I have to go, I have to go by,
put more hedges on and we did that.
What it does is that, you know, an event like that is kind of
like getting punched in the face by Mike Tyson in a way, right?
Well, you know, talking to some of my peers, like, like, you
know, if you run like concentrated small cap, like you
could be down like 20%, dude, right?
Small cap guys are not. Loving life on average, Yeah.
Yeah, Yeah. No, it's, it's been cheap for a
while, right. It's.
Always cheap, but it just keeps getting cheaper.
Yeah, it's cheap. It keep just keeps getting
cheaper. Now imagine like.
There are like real consequences of these tariffs, right?
Like depending on, you know, what you own, if you're like an
importer, right, If your business depends on a lot of
imports, like that really hits you.
And, you know, I think the tower is hedging.
What it does is that it just allows me to stay very calm and
very what like, I mean, don't get me wrong, like the first
like week, like like the first like 10 days.
It's like an insurance policy, man.
It helps you sleep. A bit, yes, exactly.
It's like the hurricane insurance, right?
Like a. Hurricane.
Yeah, you hope you don't have to cash it in.
If you do, it's nice to have. Exactly.
And you know one thing that's.
Like really cool is my analyst and I, we're what we're
literally thinking well, like how do we take advantage of
this, right? This is a super target rich
environment right now and all this is cheap.
That's cheap or you can make 5% by some, you know, puts like not
that we've done that, you know, that's something that we may
think about. But there's all this opportunity
and you know, if our towers hedges, like what's really nice
about towers hedging is the COVID when by the time we were
done, by the time we sold our puts, we winded up with like a
15% position in what just the proceeds from the towers
hedging. But my long book was down 35%,
right? So we wanted it like being down
about 20 at that time. But like all of a sudden like I
have 20%, that 15% actually becomes 20 because the law book
has shrunk so much. So we wind up with like 40% cash
like in early April where and then like you kind of think
about your relationship with your investors.
Like it's very different when you have an event like this and
your LP's are calling you and they're like, oh, what's going
on? Like what's And you could tell
them like what we hedge ahead of time.
We know how to navigate environment like this.
It's kind of crazy. This is really like the first
time in five years because you have COVID and then you have the
22 shock, right? Like 22 shock wasn't like as big
of a draw down, but and then you got the tariff drawdown.
So but it's like having like know how to do that, like
leaning into this hunch about risk that's about to emerge and
just acting on it. And then like having the
calmless as you know yourself and as an organization, right?
Because like, you know, my analyst and I all we're talking
about today, like we're not talking about, Oh my God, we're
down. 2530% like how do we get out of this?
Like, no, we own like liquid positions.
We have these puts. And if anything, like there's
like companies out there where I think they're still pretty good,
like, you know, both on the law side and short side that are
really interesting. And then you don't start by
investing in companies where you're like, Oh, we, you know,
you start with, oh, something like Alexander, you could buy at
a high 8-9 percent dividend yield with like train way below
like NAV, right, or even like the Vornado prefer.
Or you could go do the dream residential, you know, buying
multi family at 8 1/2 percent cap rate.
They're about to be taken out, right.
And then there's like other names that we're looking at.
They're just like so much for us to do right now and that
organizationally, like we're not placing blames.
We're not like, you know what, we're just like having these
like really awesome conversations on, hey, have you
look at this name? Have you look at that name?
And this time around, it's not just me.
One of the things that was difficult about COVID was, you
know, at that point was just me. And then, you know, thanks to
something that you said a few years ago where you said, hey,
you know, what's great about Twitter is that you put a tweet
out and it's like 10 people could talk to you about a topic.
We kind of like leverage that and we build out a team in 22.
I have to credit a lot of what I do.
I'm building out that, you know, the Twitter channel on that one
quote that you said on value after hours like like that, you
know, I take, I, I take compliments.
You're free to you're free to send them.
Here. No, I'm glad, man.
I'm glad it helped. Yeah.
And tell me too.
I've kind of. Kind of taken a step back.
From everything recently, but I I think it's been an invaluable
source to me and more than anything the relationships that
I've made from it and manual of ideas.
I can't talk about, you know, my network without talking about
John. It would be disingenuous to do
so. Yeah.
So and the Toby for, you know, help me get it started.
So yeah, it worked out. Love, Toby.
Love, Jake, Love. You know, John, I would say the
one thing I'm the proudest is as I've gotten older, in my 40s, I
become less ignorant and you know, instead of just like
holding on to that really old school value investor mantra,
I'm like, I want to be a little open minded and you know, pay a
little bit of attention to whether it's like passive flow,
pop positioning, like technicals, what not so much
technicals, like everything that we do is still very DCF driven,
but like technicals. In terms of why your entry point
into a stock, right, You're not looking, you're kind of ignoring
something that a decent part of the market looks.
At like yes, yes, makes it to look at yes, yeah, and I'm I'm a
lot. Less like this is the only way
to invest. I'm a lot more open to Yeah, the
only way is a young thought or maybe a very old thought.
We'll see how I. Evolved, but I think there are
many ways. So I appreciate you coming on
and sharing your knowledge, man Thank you.
Oh man. So it's always a pleasure to
come on the pod and. You know, I feel very
privileged. Well, we'll see you again soon,
maybe in a year or so, who knows.
Hopefully before then and hopefully, hopefully we'll get
Korean BBQ. Before then.
Oh yeah, that'll happen for sure.
All right. Talk soon.