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Where do REIT'S go from here ?


Ulti
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https://podcasts.apple.com/us/podcast/jim-chanos-on-why-some-of-the-worst-hit-parts/id1056200096?i=1000566614549

 

I thought the pod was interesting. At the 17 minute mark , Chanos discusses how MF and reits in general are overvalued in a normalized earning environment...for MF 2-3%cap rates pre capital spending with approx 5 % 10 years. I thought that most in the space

have locked in low rates on their debt and if construction loans are more expensive that means less product on the market and rents stabilize at the current higher rates. What am I missing?

 

 

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Thanks.

 

REITs and making real estate work for me is something I have been thinking about as well:

image.thumb.png.ba9422330cc317858de3358603f32fa1.png

STWD and BXMT dividends look attractive and inflation might not be a problem:

 

https://www.reit.com/news/blog/market-commentary/how-does-inflation-affect-reit-and-stock-performance

https://www.nareit.com/news/reit-magazine/may-june-2022/where-inflation-heading-rest-2022-and-what-will-be-biggest-impact

 

Statistics etc. is nice, but the devil is in the details. On the other side of Chanos on the long-short spectrum you have BAM:

 

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Folks are still doing deals for office at 6 caps and triple net at 4 flat in the private market. So while these aren’t prices I’d be paying, saying otherwise, like Chanos, is basically just putting together a valuation short. 

 

On MF, I’ve been saying now since after the initial COVID wave that it should be viewed as the new treasury if inflation is a concern. They’re liquid, hard asset protected income generators that bump payout every month typically. However I’m not sure I see much more room for spread compression against treasuries.

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I respect Chanos, long term he's got a good record of short selling. He plays fast and loose with the numbers that he throws out on REITs and uses different definitions/analytical methods that make things incomparable. My 4.5 cap is his 3.0 cap. He never adjusts for development always subtracts full s,g&a (we can debate this one ad nauseum), only quotes trailing even if we knwo of material changes that will happen w/ the go forward (like a building coming online or somehting)...he generally has a bearish bias and things each cycle is the next s&L crisis and that we're going back to 10 caps. from interactions he seems very focused on the filings / reported financials rather than looking thorugh to the substance with respect to things like joint ventures for example. 

 

his and others views helped me sell office at what were in hindsight good prices, but i pretty much disagree with every single number the guy ever throws out. I don't think he's "lying" so much as he has his view as to what's the right way to analyze these things and that view vastly differs from mine. over time the market will decide who's right.

 

Listen to what he says. Note the reasons and look into them, but run your own numbers. It's one dude's view. 

Edited by thepupil
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https://calculatedrisk.substack.com/p/housing-completions-will-increase

 

This is what Fed Chair Powell was referring to last week when discussing house prices:

How much will it affect housing prices? Not really sure. Obviously, we are watching that quite carefully. You’d think over time … There is a tremendous amount of supply in the housing market of unfinished homes … and as those come online …

He didn’t finish that thought, but clearly with weakening demand, and more new supply (and increasing existing home supply), house price growth will slow sharply. Rent growth should slow too. (But house prices will be up 20%+ year-over-year in the Case-Shiller report next week due to reporting lags!)

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I think there’s a lot of these sort of misconceptions around that aspect of housing. Prices rose steadily and then violently and then kind of settled. They’ll hang in a range like everything does, but there’s little to show a scenario where we revisit pre covid prices. I hope we do, but don’t hold your breathe. Rents too. The bulk of the rent growth already happened. But every month new leases get marked to market so if you signed a lease 11 months ago and 10 months ago rents spiked, now you’re paying for it. Most of the headlines are bullshit narrative spins put out by folks with an agenda. Can’t tell you how many articles I’ve seen about rents slowing and then the numbers are basically that they only went up 11% this month vs 12% last one….like ok. Cool story bro. 

 

There is a whole lot in the housing ecosystem that will straight bank cash if prices stay around these levels. In other words you can get these stupid headlines about housing slowing or rents falling but if they continue to remain in absolute levels at the current pricing thresholds for purchasing or renting..it won’t matter.

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And to clarify, this isn’t to say the idiots who bought 3 caps while underwriting 10% annual rent growth don’t get blasted, but existing owners of assets and ones who are well capitalized are sitting pretty. Rents and absolute prices don’t really have much room to come down unless something much more severe than what we are currently looking at occurs.

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40 minutes ago, Ulti said:

https://calculatedrisk.substack.com/p/housing-completions-will-increase

 

This is what Fed Chair Powell was referring to last week when discussing house prices:

How much will it affect housing prices? Not really sure. Obviously, we are watching that quite carefully. You’d think over time … There is a tremendous amount of supply in the housing market of unfinished homes … and as those come online …

He didn’t finish that thought, but clearly with weakening demand, and more new supply (and increasing existing home supply), house price growth will slow sharply. Rent growth should slow too. (But house prices will be up 20%+ year-over-year in the Case-Shiller report next week due to reporting lags!)

If I had to guess - housing prices are already down 5-10% from the peak earlier this year, it just hasn't shown up in the numbers yet.

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2 hours ago, Spekulatius said:

If I had to guess - housing prices are already down 5-10% from the peak earlier this year, it just hasn't shown up in the numbers yet.


In my area 1 house sold for 1M a few months ago. Now a nearly identical house (same floor plan, similar upgrades etc) has been on market for 50 days and price has been “reduced” to 950k and no takers.

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It’s rare to get great comps like that. But they’re useful. One big trend I’ve noticed in markets I follow is that total dogshit gets listed for way more than it’s worth. It then sits there, then gets massive price cuts, and can create the appearance that there is no demand. That appearance would be accurate because no one wants a mediocre property for 100% premium to its fair value. I probably get a dozen flyers a day for raw acres in various southern places. It’s almost exclusively this above problem. Like no I’m not paying $200k an acre for land in Tavares Florida and no I don’t care that it’s technically waterfront either. This was $15k an acre land pre COVID and maybe it’s worth a few multiples of that now, but fuck off with that asking price. 
 

So I think a good piece of the puzzle as well is this aspect of the market. Everyone and their mother has heard of how hot the housing market is and so everyone is reaching for the moon on price. Not everyone’s properties are great though, and not everyone can afford a 6% mortgage, so as always, quality matters. 

Edited by Gregmal
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You could buy an acre of land in the town I live to build on.

 

We have a friend from town who bought a lake house (actually just a property with a tear down build on it) in Southern NH. Not  a bad area but pretty remote from where we live (~1.5h away). We think he vastly overpaid  - he bought in winter 2020/21. Probably too remote for AiBnB even, since the next restaurant is about 25 minutes away.

Prices are being reduced a lot for similar properties in this areas (houses around lakes), since those are discretionary purchases. However, I also noticed that many smallish towns in NH seem to be much lively than before the pandemic. Example is Hillsborough NH which is a great neat little town with a bunch of great restaurants, I highly recommend a visit or stop if you are in the area. These towns have benefited from the structural changes from the pandemic and we saw many license plates from MA and CT etc there. I don’t see this going away and it’s great for them.

Hillsboro
https://goo.gl/maps/9VqXKNcmDkhnWcLT7

Edited by Spekulatius
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18 minutes ago, Spekulatius said:

You could buy an acre of land in the town I live to build on.

 

We have a friend from town who bought a lake house (actually just a property with a tear down build on it) in Southern NH. Not  a bad area but pretty remote from where we live (~1.5h away). We think he vastly overpaid  - he bought in winter 2020/21. Probably too remote for AiBnB even, since the next restaurant is about 25 minutes away.

Prices are being reduced a lot for similar properties in this areas (houses around lakes), since those are discretionary purchases. However, I also noticed that many smallish towns in NH seem to be much lively than before the pandemic. Example is Hillsborough NH which is a great neat little town with a bunch of great restaurants, I highly recommend a visit or stop if you are in the area. These towns have benefited from the structural changes from the pandemic and we saw many license plates from MA and CT etc there. I don’t see this going away and it’s great for them.

Hillsboro
https://goo.gl/maps/9VqXKNcmDkhnWcLT7

100%. The structural fundamentals are still there. So if you are overpaying it’s never going to be a great investment. If you locked a 30 year at 3-4% it’s still probably not the end of the world. But location is always key. From what I’ve seen the “relevance ring” as I call it, definitely expanded. @thepupil knows about what I mean in DC. Lots of areas fall into this category. In NJ it’s always been city based proximity. Mahwah the greatest example I’ve seen in my lifetime. Florida has a lot of them. But buying anywhere just cuz is gonna backfire for those who didn’t think it through.
 

And of course, there’s the landmine properties or rural stuff that you have long term bag holders in who now throw out sucker prices hoping for an impatient buyer. In my town specifically you have 100 year old homes with major work needed that were $250k pre COVID and people asking $500k for. So really no different than anything else. Invest wisely. Make sure you are comfortable being a long term investor. I would hate to be up against a short term shot clock in a shitty flip or project where I based by underwriting on a mirage or short term aberration. 
 

Ive actually heard a number of stories where contractor friends or folks looking to do work have said they seek out quotes and the guys giving estimates tell them “hey, wait a little bit because you’re paying way too much but hey, I’ll do that deck renovation if you really want”. 

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I've been really surprised by the amount of renovation I've seen at crazy prices. I've been holding off on a deck project since the new year due to wood prices but my neighbors are building decks with $9 2x4s left and right. 

 

Ultimately, I think the higher rates are going to further reduce inventory. Cash will be king. Rents will keep rising reflecting the higher mortgage rates, but real-estate prices will hold steady due low inventory.  

 

What is insurance doing given the high replacement costs of housing and autos?

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13 minutes ago, Ross812 said:

I've been really surprised by the amount of renovation I've seen at crazy prices. I've been holding off on a deck project since the new year due to wood prices but my neighbors are building decks with $9 2x4s left and right. 

 

Ultimately, I think the higher rates are going to further reduce inventory. Cash will be king. Rents will keep rising reflecting the higher mortgage rates, but real-estate prices will hold steady due low inventory.  

 

What is insurance doing given the high replacement costs of housing and autos?

I’ve gotten several renewals last few weeks and surprisingly they have not moved much.

Edited by Gregmal
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7 hours ago, Gregmal said:

I’ve gotten several renewals last few weeks and surprisingly they have not moved much.

My homeowners and car insurance center package moved up in price less than inflation. I think it’s about 5-6%.

Edited by Spekulatius
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My primary residence homeowners policy premium increased by 10% despite $45,000 of hurricane claims for Ida and almost every insurer leaving the market where I live.  People I know that can't renew their policies are seeing 2x or 3x is some cases.  I think the new standing seam metal roof they paid for helped lower the premiums going forward.  Oddly, USAA is still applying a "claims free discount" despite the paid out claim.

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I haven't noticed my home or auto insurance go up. It's interesting because you would think the areas we have seen the most inflation is housing and vehicles. TRV was one of my inflation plays thinking they would raise premiums in excess of inflation (with home and auro prices). My idea doesn't seem to be working out.

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Make sure all of you home and rental property owners keep raising your limits of coverage on homeowners insurance and not just sticking with the inflation adjustments from the insurance company. I'm sure this is very market specific, but in California the replacement costs have gone up exponentially to the point that most homeowners are way underinsured. 

Edited by RedLion
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The tier two “post covid remote work” cities have been a gold mine. The few properties in denver I have held up incredibly well, as Greg says the fundamental demand is still there. I’m looking at 1-2 year cash on cash returns of 150+% which I’m in the process of cashing out. These are first time buyers or people trading up. Meanwhile the second homes in the mountains and ranches are coming down in price. 

 

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Look at the market lately. One day treasuries are up big on inflation fears and the next they’re plummeting on recession fears. Guess what? Recessions are part of life. Deal with it. Inflation is too but again, does anyone really believe this isn’t a COVID byproduct? IMO it’s all bullshit if you’re well capitalized and can withstand a couple years of “turmoil”. End of the day the bulk of the money made with real estate is made watching paint dry. If you wanna get shaken out by CNBC or Cramer go ahead. During recessions many reits do very well. And during inflation? Again, looks at the 70s.

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