Mar 07 2018 49 mins 10
In Episode 96, we welcome two of the brightest guys in real estate, Craig Leupold and Jim Sullivan of Green Street. After touching on Craig’s and Jim’s backgrounds, the guys jump into real estate, with Meb asking about Green Street’s approach to the real estate markets (public and private) and how they think about valuation. Craig gives us an overview, referencing Green Street’s REIT research (focusing on the public markets), their real estate analytics (focusing on private markets), and their advisory consulting group. Craig touches upon lots of ideas – understanding the value of the properties owned by the various companies… identifying the associated premiums or discounts at which the companies might be trading… a deeper dive into their real estate analytics lineup… looking at how to allocate capital… Meb asks how the real estate world looks today, and what’s the outlook for 2018. Craig tells us that with the exception of retail real estate, most sectors are seeing increases in rents and occupancies. But fundamentals have moved from “great,” to “good,” to now, “okay.” He goes on to give us his growth forecast over the next four years, as well as what he expects for commercial pricing over the next 12 months. When Meb brings up “returns,” the guys make the distinction between public and private markets and how there’s a divergence. Private real estate is generally fairly valued today, yet in the public market, REITs are trading at an 11% discount to their unleveraged asset value. Jim dives into greater detail on this topic, telling us how the average REIT should trade at a modest premium to NAV. The reason for this is that an investor should be willing to pay the fair market value for the property owned by the REIT, but then there’s the added benefit of the management team and the liquidity of the REIT structure; both deserve a premium. But again, today, we’re not seeing this premium today – quite the opposite, in fact. Meb brings up valuation, asking about how to distinguish between buying opportunities and value traps. Jim tells us it’s situational, and depends on the property type. This dovetails into a discussion about pessimism in the mall sector. Soon, the conversation turns toward rising rates. The common opinion is that rising rates are bad for real estate, but Jim tells us it’s more complicated than that. If rates are rising due to our economy accelerating, then that could be positive for commercial real estate, leading to higher occupancies and rising rents. There’s far more in this episode: activism in the real estate space… how the real estate market looks around the world… the challenge of figuring out what risk-adjusted returns should be in different global locations… which geographies look particularly attractive today… farmland REITs… and Craig’s and Jim’s one piece of advice to investors looking to allocate to the REIT space. All this, as well and Craig’s and Jim’s most memorable trades, in Episode 96.
