The Exchanges

Q If you go back around that time, what was the public real estate investable universe then?

A It was about three hundred billion dollars, so it wasn't huge. It was much more concentrated by sub-sector. They used to call it the four major food groups, office, industrial, retail, and residential, and those companies accounted for over two-thirds of the entire REIT index. The entire space was more correlated. Real estate really moved together. Certainly some subsector had more supply than another, and you had to normalize for that. If you were an analyst covering apartments, you could pretty easily cover the office space as well. From then till now, you've had two things happen. You've had the introduction of secular risk in real estate. We learned that with office and COVID. We learned that positively for industrial, negatively for malls. With e-commerce, I'm sure that's not the last of it. We'll see more of that in real estate. That's been a big factor in the old days. If real estate went down, you could buy it and just wait, and generally it would come back over time, and that's certainly not true anymore. The second thing that's happened is, as the public market has proven to be an efficient place to own and hold assets, more and more sub-sectors have come to the public markets. Data centers, towers, cold storage REITs, single family for rent REITs, gaming REITs. That's led to more dispersion within the space. In short, the absolute space has grown, the correlation is …

AI assessment note: “It was about three hundred billion dollars, so it wasn't huge.”

Q So let's walk through the different aspects of how you go about doing that. Let me just fast forward to today. How do you think about your investable universe, the different companies you're looking at to potentially invest in?

A When people think about real estate, they naturally gravitate to REITs, and REITs is not the only thing we do. There are a lot of companies that are not REITs that are 100% real estate companies. Hotel management companies, home builders, real estate service providers like CB Richard Ellis or Jones Lang LaSalle. I would define everything we do as full, 100% real estate companies, just not solely REITs. Both spaces have evolved. REITs have grown a lot, and there are more options on the menu to exploit a view, but there's been a lot of growth and evolution in the non-REIT side of the business too. When you look at home builders or hotel companies, the way many of these business models have evolved They're not acyclical businesses, but they become much less cyclical than they once were. When you compare a home builder pre-GFC with a lot of land on its balance sheet and a lot of leverage and a business model that forces you to invest your free cash flow while the cycle is getting hot, and then ultimately the cycle stops and you're writing down book value and you're having problems, that's evolved to almost 100% asset light models in some cases. No leverage, real free cashflow generation that's used to shrink the float. And so these have become much better businesses. And when you look at the hotel business, it's not dissimilar. There's been splits of the cash flows that come out of…

AI assessment note: “I would define everything we do as full, 100% real estate companies, just not solely REITs.”

Q What'd you find in the private side that eventually led you to switch over to the public side?

A I wish I could give a really thoughtful answer here. The truth is it all happened by happenstance. I was working at DLJ. I was enjoying it. I liked it. I was on this path. I had this thought in my head from my Lazard days of the interesting nature of public versus private markets, but there was no one in my cohort from Wharton who was entering the public business. One of my mentors early on was Keith Barquette at Angelo Gordon. He had been instrumental in starting their real estate business. My brother worked there, and Keith invited me to his 40th birthday party. I met this guy named Art Rubel, who had quarters prior, less than a year before, launched what was then one of the first hedge funds focused on real estate securities. I spent the entire party talking to Art and what he was doing, and I found it really interesting. He reached out to me afterwards, said, why don't you come over to the office and we'll have lunch. He laid a path for me, which was all your friends from Morton are in the private equity business. Be the one guy who's doing something, use the same analytical capabilities, but express your view in public markets. Public markets are going to grow. If you believe Sam Zell, and I had come from the Zell Lurie Center, his point was this space is going to grow. I'm going to be an early person doing it. I literally don't have an employee. You can get on the ground.…

AI assessment note: “The truth is it all happened by happenstance. I was working at DLJ.”

Q What does shorting look like in this sector?

A It's funny. People often say it's hard to short REITs because they pay dividends. If you go back to who the market participants are today, If you've got a significant amount of passive capital, which the REIT market now does, and a passive capital doesn't really care about anything, oftentimes securities can trade at levels that are higher than they otherwise would be because they're paying dividends that they can't afford or have low integrity or have risk of being cut. The short book breaks into two categories. There are the alpha driven shorts. These are shorts that on their own were expecting To make a lot of money when the world sees what we see over some reasonable period of time. We're much more catalyst focused on the short side than we are necessarily on the long side. Another portion of the short book are means to be longer something on the long book. In the depths of Liberation Day, we bought a lot of Hyatt. Hyatt's an amazing company. It's a company I know very well that got massively repriced to a level that We felt even if we went through a recession, you were going to make a lot of money. We didn't know for sure you weren't going to go through a recession. There's a lot of unknowns happening around Liberation Day. It's not uncommon for us to say, okay, what are the lowest quality hotel REITs that are not going to grow the same way Hyatt is going to grow, where th…

AI assessment note: “The short book breaks into two categories. There are the alpha driven shorts.”

Q How do you think about position size in this sector?

A I like to run concentrated. One of the nice things about real estate is you can oftentimes know very well the risk you're taking. If you're looking at an apartment REIT, And you can see every single asset they own. You can see every single secured and unsecured obligation that they have. You can see the incentives of the management team. You can understand the private market value. You might lose money in that stock, but you can quantify the risk. You can really understand through hard work and disclosure the risk that you're taking. There are times when high quality real estate with solid balance sheets and great management teams For short term reasons get absolutely dislocated. And my view is that's not supposed to be a five percent position. We run with 12% positions. We don't do it all the time. It's reserved for special situations. If we really love something and we think it's incredibly downside protected and the passage of time works in our favor and we're comfortable in the case of an apartment read that there isn't this secular boogeyman living around the corner. We're still of the belief that buying a lot of something you love is a good way to allocate capital.

AI assessment note: “I like to run concentrated... We run with 12% positions.”

Q Been a lot of change in housing. Now, housing's delivered, single-family rentals, mentioned change in the business model, home builders. Where do you see the landscape for the various subsectors of housing today?

A As dicey as ever, we have a housing problem that I think is leading to political outcomes that are gonna lead to hopefully somebody finding a way to deal with this housing problem, but single-family homes in America are too expensive for Americans. Full stop. The home builders have done better than many expected them, including us in some instances to do in this environment because they've leaned heavily on these rate buy downs. They've gone to consumers and said, if you want to buy an existing home, which by the way, nobody wants to sell because they have three percent mortgages and mortgage rates are at seven. So you have this frozen existing home market. But if you could find someone to sell, you've got to get a seven percent, seven and a half percent mortgage, depending on what timeframe we're talking about. The home builders will say, I'll buy down your mortgage to a five percent mortgage. It might impact my margin by four or 500 basis points. If I'm an ROE machine, I'm still paid to run my machine, generate cash flow, shrink my flow, and maybe I'm generating less cash flow, but cash flow is better than none. We'll see how long they can do that. As rates have come down recently, there's been very little elasticity of demand. The consumer is stretched. The low-end consumer Low end homes are not in a place where they're transacting in a way where there's any element we belie…

AI assessment note: “As dicey as ever, we have a housing problem”

Q What are some of the other subsectors that you find interesting today?

A Manufactured housing. Sam Zell created a manufactured housing company called Equity Lifestyles. This is a phenomenal business. This is a business that's grown earnings in 99, 2002 1001, 2007, 2008. You name the year, it's grown earnings. And their business is simple, but incredibly safe. They own the land underneath manufactured homes. They don't actually own the homes. It's an incredibly stable stream of cash flow. It's a cash flow that can grow. They have high quality, many times age restricted communities where you're able to push those rents because they are such an affordable alternative. Those kinds of high quality companies have gotten interesting in the public markets. We're spending a lot of time on the cold storage space, which has been a really interesting space. There's a public company now called Lineage, which was a private darling that came public a little over a year ago at High seventies a share quickly went to close to 90 dollars a share. Today it's at 35 dollars a share. These are just numbers. It's nothing to do with valuation. There's a handful of things that have happened in that space. Like other real estate spaces that have great fundamentals, they got a lot of supply. They've been digesting that. There are customers who are the distributors of food throughout the country. Got a lot better at running their businesses through COVID. So occupancies ticked …

AI assessment note: “Manufactured housing. Sam Zell created a manufactured housing company called Equity Lifestyles.”

Q What did you learn at banking as that foundational ground before you turned to investing?

A I joined that group in 1999. REITs were the antithesis of what anybody wanted to own. So the most impactful thing that I learned at Lazard, having been the grunt guy, running all the models in advance of the CEOs coming in to complain to my managing director why their stocks all traded at 70 and 80 cents on the dollar was saying, Here you are. It's not complicated. You have 100 dollars of apartments trading for 80 cents. You have 100 dollars of industrial real estate trading for 75 cents. At that point, I thought I was going to use real estate investment banking as a stepping stone to real estate private equity, which I ultimately did. That was the first moment I said, this seems like an interesting way to exploit valuation differentials between the public and private.

AI assessment note: “most impactful thing that I learned at Lazard... exploit valuation differentials between the public and private”

Q Within that idea that there's secular risk that didn't perceptually exist 20 years ago that does now, what are some of the other changes in the nature of the real estate investment opportunity set in the public markets?

A Real estate is still dominated by the private market. 90% of real estate in this country is owned outside of the public market. So you've got 10% of the market that trades publicly. You've had two large movements of capital to market participants Since I got in the business, the first is active to passive, and the second is the advent and success of the pod model. When you break down who's investing in real estate today, you still have active management on the mutual fund and long-only space. They're not trying to do much more than outperform an index by a very modest amount. For them, taking a bold stance is having an extra hundred basis points in Prologis versus the index. They're doing something very different than we are. Passive, By definition cares about nothing other than recreating the passive index. There's not a lot of thought as capital moves around there. And then the pod model, which has been an incredibly successful model, but is a model that does something incredibly different from what we do, and they're hyper short-term focused. 80% of the returns of these pods are generated on quarterly earnings or the day after quarterly earnings, which means they are looking out for one quarter. Then at the bottom, leftover is us. There used to be few firms doing what we do. Now there are very few firms doing what we do. We take a different approach. We look at everything th…

AI assessment note: “You've had two large movements of capital to market participants Since I got in”

Q What is it that you're looking for to add to the portfolio when you've got quite different business models from a traditional hard asset and then some of these asset light businesses?

A We attempt to boil everything down to the best risk adjusted return, the best asymmetry. The first tool in that process is something that I've worked 15 years on honing, which we call the asymmetry ranker. So every analyst Whether we own a security that you cover or not has an updated model on this company and a expected IRR. That expected IRR gets discounted at different rates depending on what the business model is. A levered hotel REIT gets a much higher discount rate, not surprisingly, than an unlevered apartment REIT. Then we have a qualitative overlay. How good is the management team? How is management incented? What is the history of this company's capital allocation? What the asymmetry ranker does is it takes those cash flows and models them out. We have a terminal value. We discount it back at what we think is the appropriate discount rate, and that gives the long pond warranted value of that individual security today, which is often not where it trades in the market. We rank those companies in our asymmetry ranker by the delta or the difference between Stock price and what we deem to be the fair value. We don't plug that into some quantitative model in a trade securities. It's an idea generating tool. We use that to decide where we're going to allocate our firm resources and where we believe the best return on the best of time will be. The things that ultimately are t…

AI assessment note: “We attempt to boil everything down to the best risk adjusted return, the best asymmetry.”

Q When you look at that preponderance of money, either passive or very short term, where do you see their inefficiency or in your perception mistakes that other people are making?

A I want to be clear. I don't think they're mistakes. These guys run great businesses. The passives run 10 jillion dollars or whatever the largest number you could imagine is, and the pods have grown four X since Long Pond has existed. They're doing something different. They're playing hockey. We're playing basketball. The fact that they've grown has outputs that benefit us, and that's where we're focused. We have one key thing we're looking to do. The way we've done it has changed over time, and we've adapted in how we execute this, but we have a view That our job is to identify and exploit asymmetry within publicly traded real estate securities, asymmetry defined as a disconnect between intrinsic value and stock price. We have another view that volatility and asymmetry tend to hang out together. By points of volatility, there's probably more opportunity for firms like ours who can take a little bit of duration and be looking out through a longer investment horizon than others. If we back up and say, well, what's the output of all these players? If the output is that the average move on earnings is two times what it used to be, but the average change in earnings is the same, then what we're seeing is larger disconnects from intrinsic value that we can seek to exploit. Our coverage model and our process is designed to put ourselves in a position to play offense. There's more vola…

AI assessment note: “I don't think they're mistakes. These guys run great businesses... what we're seeing is larger disconnects”

Q Over the course of time, how does that translate into portfolio turnover?

A It's episodic. In Liberation Day, we're moving a lot of capital really quickly. Cyclical securities got hammered across the board, good and bad ones. Our experience is often, they all go down at a similar level in those periods of time, so you get a chance to buy the really good ones at great prices. In the case of Liberation Day, A lot of what we did was sell stocks that were down a little to buy stocks that were down a lot that had these compounding characteristics like Hyatt. Other times when the world's a lot less volatile, the turnover can be de minimis. We can go weeks without doing much. It tends to be fairly episodic where we may do very little or we may be very patient. Oftentimes when one opportunity presents itself, it's in an environment where many present themselves.

AI assessment note: “It's episodic. In Liberation Day, we're moving a lot of capital really quickly.”

Q If you did it as just a quantitative exercise and took your asymmetric ranking, you said, hey, that's a portfolio we could buy quantitatively. How different is what you end up putting in your portfolio from just what the numbers would tell you?

A It's meaningfully different, and it can be different for a whole host of reasons. One is portfolio construction and risk management. I've had the indignity of having had this, and experience is what you get when you don't get what you want. In 15 years of running a hedge fund, every year does not go exactly as you want it. Very few do. One of the big things that differentiates between what the asymmetry ranker spits out and what the portfolio looks at is The asymmetry ranker doesn't care about factors. It doesn't care about correlations. It doesn't care about any of that stuff. We're not a factor neutral fund, but we respect factors. We have lived in environments where we owned too much of a cyclical factor. All individual securities that turned out to be asymmetric, that generated their IRR over a reasonable period of time, but were very similar from a factor perspective. And on the short side, short, many securities that were challenged, had credit issues, had problems, But we're all very high on the defensive factor, and when you're long a lot of cyclical and short a lot of defensive and for Q-A-T-E-N happens, you learn you have to respect factors, and the asymmetry ranker doesn't think about those kinds of things.

AI assessment note: “It's meaningfully different, and it can be different for a whole host of reasons.”

Q I'd love to ask you about the office space. Felt like there could be secular headwinds coming out of COVID. How has that all settled out?

A That's been a fun one to watch. Yes, in the depths of COVID, we were never going to use offices again. Everyone was going to work from home. That has certainly reversed itself pretty meaningfully, not a hundred percent, but that has led to a lot of these markets that were left for dead coming back viciously. The supply and demand for space in New York City is excellent. San Francisco is bouncing back in a way very few thought it would As recently as 12 months ago. This all office is left for dead. Today seems highly unlikely, and the private markets and the public markets quickly got back to a point where they are willing to ascribe capital at lower cap rates than people would have expected a couple of years ago. The supply and demand for space is much better, which led to supply and demand for capital to be much more fluid. One still has to differentiate between A and not A office buildings. The best stuff is where you're really seeing capital go and values go. What you're seeing is the best, most profitable companies. The expense of office is de minimis, and people want their employees back, and they want them to have a great experience. They're willing to pay a lot of money for the best. You're seeing that play itself out. The less than the best stuff remains dicey. It depends on location, depends on market, The office business, it's never been a great business. It's a hugel…

AI assessment note: “That has certainly reversed itself pretty meaningfully, not a hundred percent”

Q What excites you in addition to this ETF launch over the next couple of years?

A You're talking to somebody who's investing in the only GIC sector in the S&P that's still materially down since 22. The GIC and REITs is down almost 20%, while the S&P is up 40. We've now, since the beginning of 22, underperformed the S&P by 60%. I believe there's no other GIC that's even negative anymore. What do I look forward to in the next two years? Not swimming against a current. We've done well. We've generated more alpha in the last three years Than we have in the history of the fund, so we're proud of what we've done in this difficult environment. Real estate is cheap, and it's great risk, but it's not loved. We're not as popular as we once were. Coming through this, looking into the next couple of years, I'm excited about fundamentals inflecting for Sunbelt departments, fundamentals inflecting for industrial. The characteristics that exist right now in publicly traded real estate In real time are shifting for our business to be swimming against a current to with a current. The stocks are cheap. The credit markets are friendly to real estate. That 90% of the capital that exists thinks real estate in the public market is cheap. The output of that is in the last short period of time, we've seen six public processes for sales of real estate companies to the private market, all of which seem to be happening at Large premiums, if we're right, earnings are about to inflect. …

AI assessment note: “I'm excited about fundamentals inflecting for Sunbelt departments, fundamentals inflecting for industrial.”

Q So as you've gone through that process, and you have your asymmetry tracker, you've added all the qualitative inputs, how do you then take what comes out of that to make decisions in your portfolio?

A It's, did a change in a security in the public markets, did a change in that price, or a disconnect to intrinsic value, was it of a magnitude enough that there is something within the portfolio that no longer meets that same risk return or asymmetry? A lot of times that can happen pretty quickly. We think of our process as geared towards speed with the desire to allocate with duration. We're doing three management meetings a day on average in our process. The models are being run whether we own a company or not. That's all being done so that we're ready to allocate when an opportunity presents itself. Internally, we often say we want to be allocating capital where the next guy is sharpening his pencil. But we're not allocating it because we think it's gonna go up tomorrow. We're taking advantage of the ability to allocate quickly in periods of volatility, but for duration. We wanna take advantage of short-term market reactions in order to allocate capital to two-year IRR investments that are asymmetric. It doesn't always lead to a two-year hold period. It's a paradigm of how we allocate. If we allocate to something and That stock goes up or we get it wrong and the facts change and it's less good than we thought. Doesn't mean we're going to own it for two years, but the willingness to own it for two years is really what differentiates how we're allocating capital in those volati…

AI assessment note: “was it of a magnitude enough that there is something within the portfolio”