Landmark Links May 1 – Unbalanced


Lead Story… About a month ago, I blogged about how REITs were trading at a significant discount to their NAV (net asset value), raising questions as to what this meant for the value privately owned commercial real estate.  As stated in that post, there are ultimately three ways that this discount to NAV will be resolved:

  1. REIT share prices rise to meet NAV

  2. NAV falls to meet REIT share prices

  3. A combination of the two

Today, I want to discuss another aspect of the NAV decoupling: the fact that investors are pouring cash into private real estate funds at a breakneck pace despite the fact that publicly traded REITs are historically cheap, yet can’t seem to catch a bid. Via Ken Brown of the Wall Street Journal (emphasis mine):

….investors hate real estate investment trusts, which have lagged behind the S&P 500 by more than 15 percentage points over the past 12 months. REITs on average are trading a 16.4% discount to the assets they own, one of the widest gaps that has ever occurred outside of a recession, according to Green Street Advisors.

But investors love private real estate funds, which don’t trade on the market and so never are valued at a discount to their assets. Institutions and rich investors poured $71 billion in equity capital into private real estate funds that closed last year, according to Preqin. Private-equity firms held $1.2 trillion in real estate assets at the end of 2016, according to consultants PwC.

“There’s a big pile of private capital that wants to own real estate and a big pile of real estate trading at a discount,” said Jonathan Litt, the chief investment officer of Land & Buildings, which invests in REITs and has pressured some companies to take steps to eliminate the discounts.

At first blush, this makes no sense.  If investors believed that REITs are correctly valued and that the private market values would decline, they would likely avoid both spaces and wait to buy their preferred vehicle at a lower number.  Conversely, if investors believed that the private market was correctly valuing assets, then it would make sense to buy REIT shares in the anticipation that they would rise in order to catch up with their underlying NAV.  However, neither of the above seem to be the preferred play currently as investors have chosen to invest a massive amount of capital in private funds targeting richly-valued assets and forego investing in supposedly undervalued REITs.

This brings up a potentially interesting arbitrage opportunity.  Lets say that you are an institutional real estate investor who is flush with cash after having completed a successful round of fundraising.  You have conviction that the private market is correctly valuing real estate and that publicly traded REITs are currently priced incorrectly.  Now you need to deploy it and have two choices:

  1. Invest in individual commercial real estate assets and portfolios that are purchased either marketed or off market in a highly competitive environment frequently described as “too much capital chasing too few deals.”
  2. Make a bid to buy a controlling position a REIT that trades at a 16.4% discount to it’s own assets.  Then take it private.

Option number two seems like the obvious play here given the tremendous capital imbalance forming on the private side of the market and the massive and persistent discount to NAV on the publicly traded side.  I’m starting to wonder if we are going to start seeing more of these sorts of buyouts in the coming months.  If not, it sure seems as though there is a lot of capital piling in to a very crowded trade.


Moment of Truth: A whole bunch of key financial reports within the next week could tell us if the Fed has finally hit it’s inflation bulls eye.

Scale: There is growing evidence that increasing market power among fewer very large firms lead to lower wage growth.

Help Wanted: There is such a pronounced labor shortage in some mid-western regions that cities with unfilled jobs have begun handing out money, student-debt relief and home-purchase assistance to lure potential employees.


All In: Prologis was already the world’s largest warehouse owner before announcing that they would purchase competitor DCT Industrial Trust for $8.4 billion in a bid to further consolidate the white-hot logistics and distribution market.

Supply and Demand: Astronomical Manhattan retail rents fell 20% in the first quarter of 2018 according to CBRE as landlords capitulate.

Rekt: Matt Levine of Bloomberg View described WeWork’s business model in the most perfect way possible:

For one thing, it is great for the obvious reason: If you can get into a traditional mature highly competitive business, call yourself a tech startup, and get a multibillion-dollar valuation based on potential rather than cash flow, then you have achieved a profound arbitrage and really ought to be rewarded for it. But it also helps solve the first problem: WeWork’s tenants don’t have to pay two profit margins, because WeWork’s investors give it tons of money which it can then spend on giving tenants free rent. In a loose sense, WeWork’s business model is getting SoftBank to buy beer for software workers. Which is fine!


It’s Complicated: All else being equal, higher mortgage rates should lead to lower home prices.  However, all else is pretty much never equal as the past few years have shown.

Don’t Call it a Comeback: The home ownership rate rose for the first time in 13 years in 2017 and has continued it’s upward trajectory thus far in 2018 as well.  See Also: Home sales are on the rise, but the trend in buying isn’t among who you might think: is it increasingly female, graying, and childless, not male, young, and with a family.

Drive ‘Till You Qualify: As home prices continue to rocket higher, mega-commutes are becoming even more of a way of life for middle class workers in coastal California. See Also: Southern California home prices have jumped to another new high.


Predictable: From stickups and drug deals to white-collar scams, cryptocurrency-related crime is soaring—and law enforcement is scrambling to keep up.  See Also: Paypal’s founding CEO thinks that Bitcoin is the greatest scam in history.

End of An Era: The future of week consumption is filled with vape pens, edibles, and Silicon Valley inventions which could spell the end of an American classic – the joint.

Trivial: I’m not sure which is worse – that did a feature article on the five types of Nicolas Cage movies or that I read the entire thing.

Chart of the Day

SJM-L COMMUTE-0425-90-01


Peak Germany: Police were invited to take part in a bondage party after they were called to break it up because Germany is the Florida of Europe.

Karate Kid: A man was arrested for kicking swans in a park for “karate practice” because Florida. (h/t Kai Cox)

Gotta Hear Both Sides: A woman who was awakened  by the “sounds of loud moaning” discovered a naked man sprawled out on her deck with massage oil and a sex toy nearby and “bodily secretions on her patio window” because Florida.

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