UPDATED: There was an error in the “model” below that has been corrected

As President Trump makes a daily practice of pillorying Jerome Powell for failing to lower interest rates, let’s not forget the pioneer of the genre: Barry Sternlicht. Sternlicht told CNBC that the Fed was "attacking the economy with a sledgehammer, and they don’t need to," all the way back in March of 2023. A view that has, thus far, not been supported by the subsequent data.

Starwood is now putting their money (a lot of it) into bringing net lease operator Fundamental Income Properties into the complex, making an implicit bet on long-term rates falling just as the 30-year approaches a five-year high.

Starwood, with a market capitalization of $7 billion, is buying Fundamental for $2.2 billion, inclusive of $1.3 billion of existing debt. The transaction will nearly double STWD’s Property Segment, currently containing the Woodstar affordable housing business and a medical office building portfolio (plus one DC multifamily property).

Get up to speed on STWD here:

What we know about Fundamental Income Properties

Fundamental Income Properties is a net lease real estate platform founded in 2019. Following a $500 million equity commitment from Brookfield, the company rapidly scaled to a +$2 billion portfolio in just five years. Their first major deal was a $50 million purchase of a Carvana facility in Tolleson, Arizona.

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There are several ways to impair a REIT’s share price: dilutive equity issuance, dividend cuts, and being diversified in a way that makes valuation and comparison difficult. AHH hits all three and as a result now trades at both a share price and multiple below its COVID lows. Since the end of 2020, the company has:

• Grown share count by 7.35% annually

• Grown the dividend by 5.84% annually, but recently cut by more than 30%

• Funds from operations have been flat, as has tangible book value per share

• The share price is down 38%, with 31% of that decline occurring in 2025

• Currently trading at 6.58x NTM FFO

The stock has entered the “looks cheap” universe with plenty of dumpster divers kicking the tires. While you can certainly argue that the REIT is significantly below NAV, perhaps by as much as 30%, it’s not clear that the market has ever really had much regard for the portfolio value. Since 2014, AHH has traded at an average 17% discount to NAV, compared to the 7% discount for the broader REIT universe.

I believe the company’s skill set lies in developing or redeveloping assets and then selling them to larger, often better-resourced owners. As a result, the stock works best when AHH is active in the market and languishes in “pencils down” environments.

This post will kick off my ongoing coverage of Armada Hoffler, so I will be laying the foundation for what, in my opinion, will matter for performance over the next 18-24 months, including:

• The company’s DNA as primarily a contractor and developer

• Mixed-use as a strategy and a differentiator

• Their big bet on the Baltimore Harbor

• What will drive shareholder returns, and how new management can catalyze those changes

Company Background and Strategy

Like all great real estate stories, AHH starts with a rich guy giving a kid a chance he probably didn’t deserve. Dan Hoffler founded what would become Armada Hoffler in 1979 as a commercial contractor and developer. Hoffler secured $2.7 million in initial funding from Jim Fisher, chairman of Armada Petroleum, who believed in his vision to develop corporate headquarters in the Greenbriar region of Chesapeake, Virginia, what was then considered the equivalent of "building in Outer Mongolia."

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This week, I am sharing a collection of interesting data points from the world of listed real estate. Any of these would typically warrant a deeper dive all its own, but I wanted to give you all the quick hits on what is shaping up to be a busy summer for real estate markets. This note covers:

• Early reports from NAREIT’s REIT Week

• An analysis of the never-ending decline of REIT ETF assets

• REIT share buybacks have ramped this year…uh oh

• A theory of Jonathan Litt’s executive pay proxy campaign

I am also working on what I hope will be my first “initiation report” for Armada Hoffler Properties Smaller REITs suffer from lackluster sell-side coverage, so I am going to begin building a list of smaller companies for which I provide regular commentary and analysis. Paid subscribers can expect that report in their inbox sometime next week.

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REIT Week Kicks-Off

We are in the thick of NAREIT REIT Week, but investors seeking more incremental color from management teams are likely to be disappointed. The conference is coming on the heels of Q2 earnings releases, and most REITs are simply reaffirming their outlooks. Across sectors, demand trends are in focus as investors seek to understand how companies and consumers are adapting to trade and policy uncertainty. Here’s a summary of Day 1 notes from BMO (h/t ):

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This year, the outperformance of international equities relative to the U.S. has been well-reported. Listed real estate has been no exception. At least as measured by the public-traded firms, international property markets have been on fire.

There has been surprising dispersion amid some clear themes. Europe has been a winner, while French property firms have outperformed German ones by 20%! Brazil and Chile are off to rip-roaring starts as well. Are these results just the impact of a general rotation into international markets, or are underlying property fundamentals creating more sustainable tailwinds for international real estate?

The country returns below are dollar denominated through the end of the first quarter. Of course, the decline in USD has boosted these returns. In general, you are looking at a +5-8% currency effect. In some sense, foreign real estate is a good option if you are trying to reduce dollar exposure. For the most part, property firms collect revenue in their local currency. Conversely, a German manufacturer that exports to the U.S. will find their products less competitive as the dollar weakens. As I discussed with last week, foreign securities with hard asset bases act as a natural currency hedge over reasonable time periods.

REIT structures are only available in ~40 countries, so looking across REOCs (real estate operating companies) and REITs helps ascertain the whole picture.

A Distorted Snapshot of Value

At the index level, international real estate looks cheap. Reporting and structure differences make NAV and cap rate comparisons challenging. As a result, I look at price-to-book ratios to arrive at a more standardized view of relative value.

U.S. REITs currently trade around ~2.0x book value, while international real estate trades at ~0.80x book value. There is no doubt that international real estate companies trade at meaningful discounts to the U.S. REITs, but they are in line with the broader discount of international equities (~2.5x discount).

For real estate specifically, index construction and market structure skew those comparisons. In the U.S., the index is overweight tech-levered REITs like towers and data centers, pulling valuations up, while abroad, many REITs are diversified, which generally pulls their multiples down. Further, the largest developed international real estate market is Japan, where the largest REITs tend to be in the office sector. In short, the decision to rotate from domestic REITs to international ones is complicated by market structure and local nuances.

To better understand what spread actually exists, we can zoom in on a subsector. I will use multifamily as a proxy, looking at the largest operators in the U.S., Germany, and Japan: AvalonBay (AVB), Vonovia (VNA), and Advance Residence (3269). Continuing with price-to-book (specifically price-to-tangible book value), we can modify the justified price-to-book formula for REITs to use FFO instead of EPS.

As a quick review, justified price-to-book is a metric of a REIT’s returns on equity relative to what investors demand from a cost-of-equity standpoint. The numerator is the FFO over TBV minus the long-term growth rate over the implied cost of equity minus the same long-term growth rate1. If you are a finance professor about to have an aneurysm, please see the footnote.

For our first look, I will set all the long-term growth outlooks to 2.5% (roughly a developed market GDP growth estimate). By this measure, Germany looks undervalued but not more than the U.S., while Japan is roughly at fair value. This view is both currency and local conditions agnostic.

Per CenterSquare and CBRE, Germany is experiencing substantial urban rent growth. Also, keep in mind that ECB rates are expected to fall over the next year,

German residential should benefit from declining interest rates and remains attractive in a low-growth, low-inflation environment. Indications from both appraisers and the companies lead us to believe we are likely close to a trough in values. This reduces deleveraging requirements for the companies and opens the opportunity for more meaningful external growth as companies begin making acquisitions again in the coming year.

The supply and demand imbalance remains very favorable, with new completions having averaged below 300,000 units annually for over ten years against a German government target of at least 400,000. This trend is set to continue as the number of new building permits for apartments continues to fall. When combined with rent caps in place, the sector should continue to grow rents regardless of the economic environment, as a significant rent mark-to-market exists in all regions of Germany.

Meanwhile, Japan is breaking out of a decades-long malaise and is finally experiencing a modicum of inflation and wage growth. As a result, Tokyo's rent growth has begun to resemble other global gateway cities.

When we adjust our long-term growth rates up for these specific markets, including 50 basis points of currency appreciation, the relative value story begins to come together:

Interestingly, the international real estate companies above pay out less (30-40%) of FFO than their American counterparts (50-60%), so their sustainable growth rates are already slightly higher.

Whether closing an NAV discount or general multiple expansion, low starting valuations with positively revised growth are a promising set-up. Even with the recent strong performance of international real estate, there is still a disconnect between international valuations and the developing growth stories in Europe and the APAC regions.

These are not finely tuned valuations; they simply use a more standardized, forward-looking metric to better understand relative value. They also illustrate how investment returns are a function of both starting valuation and changing growth outlooks. 100-150 basis points of macro or currency tailwinds fundamentally change the relative value picture. However, as I’ll show, market structure makes re-rating a poor investment thesis.

Challenging Allocations

Perhaps uniquely, listed real estate suffers from index construction challenges. Some indices include cell towers, others do not, some include REOCs, while others limit the universe to REITs. Size and liquidity requirements restrict how expansive or narrow passive real estate products can be.

When you seek to add international exposure, all of those problems are compounded. Adding a “global” real estate ETF will still leave you overweight U.S. real estate, while ex-US Real Estate ETFs vary substantially by country and sector, which informs median market cap. As with all public investments, these minor variances leave you vulnerable to unintended factor exposures.

The three products I’ve examined - , , and highlight these inconsistencies. Despite targeting similar exposure, they deliver fundamentally different investment profiles. The heavy concentration in Japan across all three funds (23-32%) represents a single-country risk that many investors may not realize they're assuming.

Similarly, the significant differences in market capitalization bias (VNQI's $5.2B median versus IFGL's $1.2B) create unintended size-factor exposure. For example, VNQI and IFGL both include Vonovia, which owns over 500,000 rental units in Germany and has a massive $23 billion market capitalization, while RWX perplexingly excludes it.

Another critical limitation is emerging market representation. VNQI includes countries like China, India, and UAE, while the others exclude them entirely. This creates not just country risk differences but fundamental differences in property rights, capital markets maturity, and currency risk profiles. These ETFs also skew sector diversification, with each product weighting property sectors differently based on their benchmark methodology.

This isn’t to say these products don’t add value. Liquidity is a challenge in many of these markets, even for larger companies. Fibra Prologis, a Mexican industrial REIT with a dollar-denominated market capitalization of more than $5 billion, trades just $6 million of daily volume on the Mexican bolsa, and the U.S. ADR has less than $50,000 of daily trading volume.

The passive ownership of Fibra Prologis in just “international real estate” exchange-traded products is nearly 4 times the average daily volume. That doesn’t account for the ownership in country-specific ETFs and other index-linked products.

Even if those limitations would not impact your ability to build a position, it means that if international real estate were suddenly of interest to larger allocators, they would all but be required to buy cap-weighted products versus being more targeted. If the Yale endowment, in their infinite wisdom, decided to move some portion of their capital from, say, private equity funds to south-of-the-border warehouses via public markets, who would be there to sell them that equity?

If you’re simply looking to capture international real estate beta, it becomes choosing a lesser evil among your options. For the longer-term investor, though, smaller names may be structurally overlooked. Moreover, those willing to express conviction in specific geographies and asset types could be rewarded for taking non-consensus views.

The prevailing view of Japan is that it is a low-growth country destined for stagnation due to its aging population. But as we saw, Tokyo is experiencing high rent growth as Japan’s nascent inflation appears to be flowing from the top down. Do changing trade patterns benefit the LATAM region, creating a larger middle class that can consume more like their developed market counterparts?

Listed real estate is a good way to express these views. Partly because they are underfollowed and partially because the residual value from all economic activity tends to accrue to real estate.

nota bene

Despite a significant democratization of financial data in the past twenty years, some of these companies still do not translate filings into English, historical data on “prosumer” research portals can be spotty, and few countries outside of the U.S. offer much in the way of shareholder engagement. This is not to suggest there is some great informational edge going unexploited in smid-cap international property companies. I am moreso flagging the difficulty and analytical creativity required to even make sense of them.

Turning Over the Global Rocks

Here are a few interesting companies worth focusing on. Not all are necessarily promising set-ups, but they are useful bellwethers for their underlying markets and sectors.

The following are all presented in local currency terms…

DEXUS (DXS)

Australia | Diversified Real Assets | AUD 7.76B Market Cap | 3.93M shares Avg Daily Volume

DEXUS dominates the Australian real asset market with an AUD 53.4 billion portfolio. Their holdings span prime office towers, industrial complexes, healthcare facilities, and infrastructure assets. DXS’s trophy development is the currently under construction Atlassian tower in Sydney. With direct ownership of AUD 14.5 billion and management of an additional AUD 38.9 billion, DXS has an embedded asset management business that can help drive its multiple.

The company is pushing forward with an AUD 15.6 billion development pipeline across multiple sectors, positioning it for significant future growth. DEXUS recently upgraded its development pipeline to AUD 16.1 billion, focusing on value-add investments in its current portfolio.

Allos SA (ALOS3)

Brazil | Shopping Centers | BRL 10.69B Market Cap | 3.86M shares Avg Daily Volume

Brazilian retail powerhouse Allos operates an impressive network of shopping destinations across all five regions of the country. The company has become Brazil's dominant mall operator, formed from the 2023 merger of Aliansce Sonae and brMalls, with a portfolio of 58 malls in 40 cities.

The company is guiding for BRL 2.07-2.15 billion in EBITDA for 2025. With an enterprise value of BRL 18.4 billion, the company is trading at 8.7x EBITDA, around a 13% discount from its three-year average.

Gecina SA (GFC)

France | Office & Residential | EUR 6.93B Market Cap | 124,833 shares Avg Daily Volume

This one has the distinct benefit of saying you are a Parisian property owner. Gecina is a premier Parisian real estate operator with a EUR 17.4 billion portfolio in the city's most prestigious locations. Their holdings include 1.2 million sq.m of office space and over 9,000 residential units, with nearly three-quarters located in Paris proper or Neuilly-sur-Seine.

The company owns irreplaceable trophy assets, including buildings in the iconic Place Vendôme and the Louis Vuitton building on the Champs-Élysées.

Most recently, Gecina fully pre-let their Icône office development in Paris' Golden Triangle ahead of its H1 2025 delivery, securing a 9-year lease with Qube Research & Technologies at premium rental rates. Q1 2025 saw rental income jump 3.6% year-over-year, with a particularly strong performance from their central Paris properties.

Land Securities (LAND)

UK | Diversified REIT | GBP 4.38B Market Cap | 1.83M GBP Avg Daily Volume

Land Securities commands one of Europe's largest real estate portfolios, focusing on retail, leisure, office, and residential properties across the UK. The company has been recycling the portfolio from what it considers cyclical properties into asset classes with more defensible growth. In some ways, it is following the capital reallocation taking place in the U.S., focusing on Class A office and grocery-anchored retail parks instead of shopping centers.

Japan Hotel REIT (8985)

Japan | Hotel Properties | JPY 354.24B Market Cap | 20,121 shares Avg Daily Volume

Japan Hotel REIT Investment Corporation maintains a specialized portfolio of hospitality properties throughout Japan, spanning major urban centers and tourist destinations. Their properties range from business hotels in metropolitan cores to resorts in vacation hotspots.

A yen double whammy — you get a somewhat levered play on yen strength amid Japanese inflation. If the yen weakens, you should benefit from the uptick in foreign travel. A key attraction of hotels is the extremely short duration of “leases” and the real-time mark-to-market of rents. I actually think there may be some pull-forward here as people push to travel to Japan ahead of further yen strength.

Samhallsbyggnadsbolaget (SBB B)

Sweden | Residential & Public | SEK 11.73B Market Cap | 30.8M shares Avg Daily Volume

I’d include a link to the pronunciation if I thought it would help; ticker SBB is sufficient for our purposes. The company operates a diverse Swedish property portfolio across three key segments: Residential apartments and townhouses, Community properties including elderly care facilities and municipal buildings, and Education facilities ranging from preschools to universities. That diversity has not been to the company’s benefit — overlevered with expensive cost of equity the company has been in the process of spinning out its non-core units and selling off JV interests.

A large portion of SBB’s property portfolio is linked to inflation.

Elsewhere…

I wrote about the changing nature of CRE data and the implications for investors on :

Thesis Driven

The CRE Data Power Curve

Real estate investing has quietly undergone a massive shift in recent years as the production and distribution of CRE data has proliferated. As a market once defined by local knowledge, most real estate capital was similarly invested locally. When institutional capital began allocating aggressively to real estate, they needed formalized data to make inf…

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a year ago · 12 likes · Hunter

1

The odd adjustments to this formula require the kind of nerdy exploration that footnotes are made for. I have come full circle on the importance of price/book for REITs. I used to believe the complicating factors of real estate depreciation on book value made the metric mostly irrelevant to REITs.

I now think there is some important, but thus far unexplored signal, in price/book for REITs. If you run IYR through a Fama-French factor model, HML has statistical significance and a beta of .40, second only to market beta.

How does the factor perform if you adjust the metric to more accurately reflect real estate dynamics? I don’t know; perhaps an enterprising finance PhD will pick up the banner. I can say that when I looked into what was driving the results, it was REITs with high cash flow multiples trading at low price-to-book values. Their cost of equity was much lower than the cash return on equity.

How is this possible? A REIT showing high cash flow multiples but low price-to-book ratios often reflects an active rather than passive investment approach. This financial profile typically indicates a REIT engaged in significant development activities, where projects carried at cost on the balance sheet haven't yet generated their expected cash flows. It may also signal a strategic property recycling program, with the REIT selling appreciated assets and reinvesting in properties with higher growth potential but initially lower yields. Additionally, this pattern often appears during portfolio transitions when REITs are actively upgrading their asset quality or pivoting to stronger markets.

My modified justified price-to-book attempts to incorporate those factors. It suffers from some shortcomings, though. First, as a rearrangement of the Gordon Growth Model, it presumes reinvestment and yields in perpetuity — an obvious impossibility for most real estate. Secondly, the value of factors partially depends on the market using similar definitions of yield. Especially across international markets, participants look at value differently. In the U.S. Price/AFFO is standard, Japan focuses on distribution per share, while other countries lean on EBITDA. I think most listed real estate investors still discount price/book as I used to.

In my view, the benefits outweigh the drawbacks. So much REIT analysis depends on non-GAAP/IFRS metrics subject to a high degree of management judgement. Using tangible book value, gives you a grounding in a standardized balance sheet number. As a result, high/low price-to-book ratios can provide important signals about what is happening strategically.

As is often the case with algorithmic ad delivery, the targeting is logical but its relevance often misguided. I have been following developments at Cushman & Wakefield since last year. As a result, when I visit the Financial Times website, it is festooned with Cushman & Wakefield’s paradoxical ad campaign which reads “We Didn’t Come This Far, To Come This Far.”1

Exactly how far CWK has come and how much further it will go is pertinent as they filed a proxy this week to move their parent company’s corporate domicile from the U.K. to Bermuda.

As a private equity hydra created by TPG, one can assume the company’s U.K. domicile resulted from some sort of legal or tax-related expediency as TPG jammed together U.K.-based DPZ, Cassidy Turley, and the legacy C&W. As I covered last year, the goal was to create a third brokerage franchise that would compete with the dual reign of and & .

Brett White, the would-be Cushman CEO (now Executive Chairman) at the time said the transaction would create a “third formidable competitor at the highest end of this industry.”

This has not happened. See the post linked below for a full accounting of CWK's current situation. As ten31’s Hiten Samtani aptly covers, CWK has spent most of the last year “balance-sheet babysitting,” and in May of last year, TPG and its partners in the CWK deal began aggressively cutting bait.

I theorized then and still believe CWK is an attractive target for its largest competitors. Last year, some tea leaves in the proxy set up management for change of control payouts, but I overlooked the challenge that the U.K. domicile presented for a potential deal.

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Cold Storage is commercial real estate’s perpetual industry of the future. The sector's outlook always appears bright, yet the promised future seems never to arrive.

With the July 2024 IPO of Lineage Logistics cold storage stands alone as a sector where listed operators represent the bulk of market share. More than 70% of North America’s cold storage supply is held by either Lineage or Americold .

The $160 billion global industry is expected to grow at an annual rate of 18% through 2030. While cold storage is most commonly associated with the food supply chain, it is also critically important for pharmaceuticals like vaccines and insulin. During COVID, the Department of Homeland Security even classified cold storage facilities as “essential infrastructure.” Like all industrial real estate, land constraints and high construction costs limit supply. Additionally, the added complexity of cold storage means new deliveries can take 12 to 18 months.

Despite these tailwinds and its enviable infrastructure classification, Americold has had a -17% total return over the previous five years, and Lineage is 30% below its IPO price. Understanding why these haven’t worked as public companies is key to evaluating under what conditions they could be attractive.

Volume-Based Business Models

Cold storage is unique from traditional industrial in various ways, but the most crucial is that the top line is heavily influenced by actual facility throughput. Instead of leasing on a two-dimensional square footage basis, cold storage is leased and managed three-dimensionally and quoted in pallet positions. Customers pay for both the storage and movement of goods through facilities.

Lineage’s 86 million square feet of property converts to 3.1 billion cubic feet and nearly 10 million “pallet positions.” The revenue per pallet position is a mix of storage and service costs. It follows that revenue is total pallet positions multiplied by economic occupancy multiplied by the storage revenue per occupied pallet plus the services revenue per pallet multiplied by total pallet throughput. This introduces a much higher degree of revenue volatility than would be found in traditional industrial real estate.

Since Americold has a more extended history as a public company, we can compare the quarterly year-over-year change in revenue versus the year-over-year change in operating profits against a traditional industrial REIT of similar size (First Industrial ). As you can see, the revenue dispersion is much greater, and the relationship between revenue growth and margins is not uniformly positive.

Even this understates the variability of cold storage revenue. Lineage outlines four different types of agreements it has with its customers:

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The asset management industry loves to find an investment theme with an opaque or poorly understood definition and then stuff a bunch of assets it was already pursuing into products that claim to capitalize on the theme.

ESG and “sustainability” funds were a glaring example from the socially piqued days of 2016-2021. A look under the hood revealed that many of those funds held the same mega-cap tech stocks that populated the tops of many non-sustainability-marketed funds. Eventually, the SEC proposed some additional rules around fund names to mitigate investor confusion, but of course, asset managers pushed back, claiming that things like sustainability were uniquely nuanced, perhaps even ineffable.

The Infrastructure Theme

As a thematic investment, infrastructure currently finds itself in the sun of investor attention. Higher rates, a revival of industrial policy, and geopolitical volatility have made the defensive, mission-critical nature of infrastructure assets appealing. Per the Financial Times,

In the first half of 2024, North American infrastructure funds raised a further $10bn, compared with $4bn in the same period last year, according to Preqin data. The third quarter has also started strongly, with almost $7bn raised in July and August so far, compared with just $2.5bn in the same period last year.

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Summary

In general, there are securities analysts and business analysts. As a listed real estate investor, I am often wearing the hat of a securities analyst, understanding how mostly known cash flows will flow through a capital structure. Occasionally however, I must lace up my business analyst skates and look at an operating company that is benefitting from an established real estate trend.

The strength of retail real estate has not gone unnoticed, however, as I wrote in my 2025 REIT outlook,

The structural undersupply of retail real estate has been one of the most well-distributed theses in the CRE market. The looming threat of e-commerce disruption, COVID-19, and NIMBY politics have each taken their turn constraining retail development in the past decade. Eventually, however, the indefatigable U.S. consumer won out, availability has plummeted, and asking rents have risen.

Unfortunately, I just don’t see much in the way of compelling value in …

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Summary

Last week, I predicted that Timber REITs would be the best-performing sub-sector in 2025. This week, I am laying out my case for timber in light of its somewhat abysmal record on public markets.

Today’s post should serve as a primer on the sector and offer a few ways to think about valuation, including:

• How the geographic allocation of land dictates business strategy, capital allocation, and beta to the housing market.

• Which macro environments benefit timber, and to what degree does 2025 look like 2016.

• Why shareholder return of capital is key to understanding valuation.

Immediately following graduate school, I went to work for a small timber fund. Timber found itself well-positioned during the height of the ESG craze. Timberland has environmental “win-win” dynamics wherein well-managed forests are both more profitable and more environmentally beneficial. Growing trees pull more carbon from the air than capital-intensive carbon removal technologies. Trees are the original carbon removal technology, absorbing the most carbon during their early, fast-growing years. When that growth and carbon capture tapers off, it is conveniently the most profitable time to harvest them into wood products.

Timber has some additional financial optionality afforded by biology. Loblolly, or Longleaf pine, the predominant species in the Southeast, has an average biological growth rate of 8% per year. That’s not a lousy inflation hedge, and should timber markets be unfavorable in a given year, you can “store it on the stump” until conditions improve.

I remember visiting our first acquisition, 1,400 acres in rural Virginia, a size downright provincial in institutional terms. After driving across a rickety bridge, bookended by deep mud, I reached a high-ground clearing roughly in the center of the property. For those used to urban or even suburban environments, the experience of seeing nothing but expansive wilderness extending to the horizon is hard to describe. With no roads, no power lines, and no structures of any kind, the world becomes a sort of biodome ensconcing you on all sides.

I’ll never forget watching a gust move across the vast landscape. It was as if the hand of God himself was brushing the treetops. The notion of “natural resources” is made viscerally tangible. I was looking at future 2x4s, paper pulp, pine straw, and diaper fillings. Such land masses provide other revenue opportunities —hunting leases, mineral rights, easements, and tradeable credits derived from everything from carbon to stream beds to habitats for native species.

To now consider that Weyerhaeuser owns 11 million acres of such land is hardly comprehendible. It’s more than the entire state of Maryland but a little smaller than West Virginia. When Fredrick Weyerhaeuser died in 1914, he already owned nearly as much timberland (2 million acres) as the two other U.S. Timber REITs, Rayonier and PotlatchDeltic , own today. Weyerhaeuser’s $30 million fortune made him potentially the wealthiest man of the era. That fortune in today’s dollars would be just $1 billion. A scale that, when compared to today’s scions of industry, inspires a different kind of awe.

Past Performance

Today, the timber industry sits at the beginning of the value chain for housing and many forms of consumer spending. As a result, it finds itself at the end of the bullwhip of changing demand patterns, global trade tensions, and wavering public interest in environmental stewardship.

Perhaps that is why timber investments, and specifically Timber REITs, have not, broadly speaking, worked. The five-year total return of the iShares Global Timber & Forestry ETF is just 5%. Over 20 years, the three US Timber REITs have basically broken even after dividends.

Note: The above chart shows price return only, although the average yield for Timber REITs has been between 2 and 3% over the time period. Additionally, Weyerhaeuser waited until 2010 to take the REIT election.

Considering these uninspiring results, it is fair to question why Timber REITs should be considered at all. As my friend Wyatt Sparks of Sea Meadow Capital put it, “We’re talking about an asset class with a duration that averages 1 to 1.5 investment careers.”

Understanding these companies and how they create and distribute value to shareholders reveals periods where timber can provide attractive returns and exceptional returns relative to broad-listed real estate.

Between 2016 and 2018, Timber REITs trounced other real estate equities. This was partly driven by the macro backdrop, but it is helpful to understand the players and how they differ before we get into that.

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Summary

As we begin 2025, here are the key REIT themes I'm watching this year. While macro conditions appear increasingly favorable, recent volatility suggests another dynamic year ahead:

• Beyond the sector's modest 4.9% return in 2023 lies a remarkable story of divergence, with a 52-point performance gap between subsectors highlighting opportunities for active investors.

• Interest rate volatility continues to create compelling entry points, particularly in REITs with strong underlying fundamentals but rate-sensitive trading patterns.

• The retail REIT sector exemplifies the danger of compelling narratives obscuring fundamental challenges, despite apparent tailwinds from limited supply.

• A historically wide valuation gap between REITs and broader equities, combined with healthy balance sheets, creates an intriguing setup for 2025.

• Major 2025 Predictions

Finally, I have not published with nearly as much frequency as I had planned. As a result I am cutting prices on paid subscriptions by more than half. While the experts all agree that frequency and consistency are more important than quality (for sucessful newsletters) — that is simply not a trade I am willing to enter. As always, thanks for reading.

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REITs ended the year up 4.9%, collapsing in the final months of the year after returning more than 15% through September. That brings the five-year compounded return, as measured by the FTSE NAREIT All-Equity REIT Index, to 3.28% -- hardly compelling compared to the Nasdaq 100’s 19% run rate over the same period. It is revealing how a bull market can shape expectations. No wonder I get weird looks or, more commonly, silence when I tell people I am a REIT investor.

Pick 4

Market conventions dictate speaking in index terms. However, just as S&P 500 performance refers to a small subset of technology companies, the REIT index-level returns conceal a more opportunity-rich environment. There was a 52% spread between the best and worst-performing sub-sectors.

While some winners, like data centers, align with broad trends and narratives, others, like office REITs, surprised investors. The weakness of post-COVID darling industrial, the worst-performing sub-sector, contrasted with the strength of retail, which outperformed the broader index by nearly 10%. These divergences highlight the opportunity in listed real estate and the potential for active management within the sector.

Buy High, Sell Low (Dividend Yields)

The volatility of REIT equity is far higher than the volatility of underlying property fundamentals. There are few better examples of this than index stalwart Prologis . Prologis, the largest publicly traded REIT, represents more than 7% of the index. It is a shockingly consistent performer, growing total revenue and EBITDA by over 13% annually. Yet, the stock has experienced two 25% round-trips this year.

In the modern market, REITs are viewed simplistically as levered exposure to rates and trade as such. Prologis's share price has largely tracked the movements of 20+-year U.S. Treasuries. The company has long-term fixed-rate debt, its leases have embedded mark-to-market gains, and it can largely self-fund growth. Should 50 or 60bps on base rates have this kind of valuation impact?

In December 2023, following PLD’s investor day, I wrote about Prologis's challenging growth prospects and specifically highlighted shareholder return of capital as a potential catalyst.

“I don't believe the stock works unless and until you have a dividend yield greater than 3%. That's a share price under $116 or a 16% increase in the dividend. That dividend increase could come as early as next quarter. PLD has on average, raised the dividend by 12%— today's share price is reflecting it as a near certainty.”

Prologis subsequently raised the dividend, and over the past 12 months, markets have offered investors several opportunities to acquire shares at greater than 3% yields.

With the usual caveats regarding past performance, I looked at 12-month forward returns for PLD shares purchased at yields greater than 3.5% (today’s yield is nearly 3.8%), stripping out overlapping periods. Such a strategy has an 83% win rate and an average return of 36%.

Taking advantage of excess pessimism, passive flows, or misplaced rate anxiety has historically worked well for opportunistic buyers of Prologis. The broader point here is that the entire reason for investing in REITs is exploiting market-driven volatility when valuations come meaningfully detached from property fundamentals.

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Summary

This week, I’m taking a closer look at the non-traded Invesco Commercial Real Estate Finance Trust, Inc. (“INCREF”). Specifically, I’ll dive into:

• What Mortgage REIT short-sellers missed.

• Why CRE debt looked attractive for non-traded vehicles.

• How Invesco uses its size to create NAV gains.

• Why sponsor-derived prices undermine investability.

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Mortgage REITs (MREITs)  have attracted outsized attention this year thanks to well-circulated short reports from Viceroy and Muddy Waters focusing on Arbor and Blackstone Mortgage Trust , respectively. These shorts, speaking mildly, have not worked.

On the surface, MREITs are not complicated businesses. They leverage their equity to make real estate loans and, like banks and BDCs, earn a spread between their cost of capital and their loans. What makes them challenging is that they offer only the highest level of insight into their loan books. 

Short-sellers used the make-up of MREIT CLOs to make broad judgments about the entirety of the loan book. MREITs utilize CLOs as a funding mechanism, which provides greater disclosure to the underlying loans but they are often filled with bridge loans that can be at the lower end of the credit spectrum. 

While loans originated in the heady days of 2021-2022 certainly faced challenges, newly issued CRE debt has much better risk-reward characteristics. New loans are being issued below peak valuations with lower loan-to-values. The attractiveness of new mortgage debt and an overall appetite for investments that could reasonably check the “credit” box was ultimately the blind spots that undermined the shorts. Provided capital markets stayed open to MREITs, loan book issues could be slow-rolled, while newly issued loans would gradually improve the overall credit profile. 

With the optical allure of distress but robust investor appetite, it is no surprise that large asset managers saw an opportunity to launch quasi-private non-traded structures to capitalize on a product whose strategy could be pitched as simultaneously contrarian yet well-understood. Thus, the Invesco Commercial Real Estate Finance Trust (INCREF) launched in the summer of 2023.

Charlie Rose, lead portfolio manager of INCREF and global head of credit for Invesco, told WealthManagement.com, 

“We’re bringing this product to the accredited investor community because we’re hearing from financial professionals that the premium income profile and limited volatility, historically, of the asset class is attractive to high-net-worth investors throughout market cycles, but particularly through this period of uncertainty,”

The portfolio, which focuses on multifamily, industrial, and self-storage, has originated loans at a weighted average rate of nearly 8%, but I’m not going to focus much on the portfolio. Instead, I will dive into the distributions and reported Net Asset Value (NAV) to date.

Redemption freezes in Blackstone’s non-traded real estate vehicle BREIT were a huge story last year (aptly covered by my colleague here). Those redemptions called into question Blackstone’s methodology for arriving at NAV -- the “price” at which new shares were sold, but more crucially, the value on which management fees were charged. As public REIT valuations fell, BREIT’s NAV steadily rose. In question were the assumptions used for capitalization rates, which were further complicated by a discount rate step that made ascertaining sub-asset class valuations challenging. At some point, the spread became too glaring, and when investors asked for their money back, Blackstone said “No,” or rather, “Not Yet.”

Loan valuations are less susceptible to wishful thinking. Since INCREF’s loans are all floating rate, provided they are current and expected to stay current, they are valued at their outstanding balance. Still, the bully pulpit of a sponsor-derived NAV has proven too tempting for Invesco, and they have mired the seemingly straightforward calculation with related party transactions that create a growing headwind. 

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Key Points

• Industrial REITs are absorbing new supply better than expected, but lacking a clear macro tailwind to power them higher.

• Sub-sector level multiples belie more dispersion within the asset class.

• Size, geography and product type are important, but liquidity will be the real value diver over the next 18-24 months.

• A handful of lower leverage REITs offer some compelling opportunities relative to the beta provided by the large-cap names like Prologis and Lineage.

Industrial real estate is potentially the most politically exposed real estate sector heading into the election. Trade policies and labor relations have roiled the asset class, and Industrial REITs largely sat out the REIT rally that began in late 2023. 

While multifamily benefits from the structural advantages of a tight housing market, data centers ride the coattails of AI investment, and office reaps the benefits of expanding from near-death multiples, industrial looks both expensive and seemingly in search of the kind of macro catalysts that powered its post-COVID ascendancy.   

Occupany & Absorption

Despite the looming uncertainty, fundamentals remain strong as supply growth has not caused runaway vacancy. Back in January, Prologis CEO Hamid Moghadam predicted vacancies would peak around 6%. According to CoStar, “The U.S. industrial vacancy rate ticked up slightly to 6.6% in the third quarter from 6.5% in the second quarter, the smallest quarterly increase recorded since late 2022.” JP Morgan notes that absorption is normalizing to pre-COVID level, and even in a 6-7% vacancy environment, rents can still grow at above-GDP rates. 

The market appears to appreciate those sturdy fundamentals, with industrial REITs trading at 20-23x trailing FFO versus 17X for the broader universe. This is partly due to robust leasing spreads as leases are marked to market. Those spreads create baseline NOI growth, assuming occupancy stays steady. As Prologis said on the Q3 earnings call, 

“You'll see recovery emerge later next year and accelerate into 2026... Looking ahead to next year, it's probably best to think about just the things that we know... On a net effective basis, you probably find yourselves somewhere around [5%] and then the last thing to think about is just occupancy trends. And again, things really murky to forecast occupancy from here.”

Industrial REIT GAAP & Cash Leasing Spreads

A layer deeper reveals the individual view of those leasing trends. Cold storage newcomer Lineage shows a data center-like 30x multiple, while smaller industrial REITs like Plymouth trade at nearly half the comp set. Size alone does not account for this dispersion. Geographic focus and the differences between cold storage, logistics, and flex space certainly play a role. 

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Some investment theses seem self-evident. The declining affordability of single-family housing, rising mortgage rates, and an aging population made an intuitive case for single-family rentals (SFR) to become an institutional asset class. Could single-family homes be underwritten, acquired, and managed at scale? The potential profits were too beguiling not to try. Buying by the square foot and getting valued at a cap rate made for a potent arbitrage as interest rates marched toward the zero bound.

Last week, Invitation Homes, , was dealt two bad hands: First, the firm agreed to a $48 million settlement with the Federal Trade Commission over deceptive rental practices. Then, a large portion of its property portfolio was in the path of Hurricane Helene, which undoubtedly damaged its homes throughout the Southeast. 

Following the hurricane, several listed REITs, including NexPoint Residential , Equity Lifestyle , Highwoods , and Independence Realty Trust , issued statements outlining the initial assessments of the impacts on their portfolios. Invitation Homes has issued no such statement. Notably, and have not provided an update either, but that may be because Tropical Storm Milton is gaining strength in the Gulf. Hurricane season is, after all, just beginning.

In public markets, themes with clear macro tailwinds are given the benefit of the doubt regarding their long-run operating models. Growing top lines cover a variety of sins. Across public and private markets, SFR has been granted an outsized benefit. For listed SFR REITs like INVH and American Homes 4 Rent ( ), the pressures of public markets have created a growing accrual between performance and reality. The one-two punch of greater regulatory scrutiny and acute exposure to natural disasters threatens to clear those accounts. 

Juicing the Hog

The essential claim in the FTC settlement related to various mandatory fees that were either egregious, opaque, or outright undisclosed. The $48 million settlement still needs to be approved by a Federal judge, but it raises the question of how important these fees were to INVH’s business. 

INVH is not shy about promoting its “amenitized” homes as a key competitive advantage. Yet, they are not eager to clearly disclose what portion of additional charges they account for in their revenue figures. Charges like the now mandatory “Smart Home Fee” were a core element of the FTC settlement. 

Both the rental revenue line of the income statement and the supplemental disclosures of “Core Rent” include other property income, like fees, but nowhere are they explicitly broken out from the rental figures. The growth of this revenue stream is periodically disclosed, like on the fourth-quarter 2023 earnings call where Chief Operating Officer Charles Young said, 

“Same-store core revenues grew 7.6% year-over-year in the fourth quarter. This increase was driven by average monthly rental rate growth of 9.4% and a 16% increase in other property income, net of resident recoveries.”

A 16%(!) increase over what becomes an interesting question to try to answer. A brief note from Bloomberg Intelligence pegged the figure at 10% of revenue, but it is unclear where they arrived at this number, even referring to it as a “line item” where none exists.

In the notes to the financial statements, the company lists late fees and termination fees, among others, at a run rate of $180 million for 2024. From the most recent 10-Q,

“Variable lease payments consist of resident reimbursements for utilities, and various other fees, including late fees and lease termination fees, among others. Variable lease payments are charged based on the terms and conditions included in the resident leases. For the three months ended June 30, 2024 and 2023, rental revenues and other property income includes $40,077 and $37,063 of variable lease payments, respectively. For the six months ended June 30, 2024 and 2023, rental revenues and other property income includes $81,922 and $72,574 of variable lease payments, respectively.”

I believe this figure materially understates the percentage of revenue coming from fees. What INVH does disclose is the average rental rate for its same-store homes, the percentage of the portfolio that qualifies as same-store, and Core Same-Store Revenue, which includes fee income. If you multiply the same-store average rent by the number of same-store units, you can arrive at the same-store rental revenue figure.  By comparing this number to the same-store core revenue, you can approximate the portion of revenue accounted for by fees and other charges.

Somewhere between 17% and 20% of INVH’s revenues may actually come from fees, at least some of which the FTC has deemed deceptive. The absolute number will be inaccurate as homes migrate into same-store status throughout the year. Still, fee revenue is a crucial component of INVH’s business model. 

Some of these fees, like “application fees” or “reservation fees,” are pure profit from a property-level standpoint. While they may consume some portion of G&A, they are presumably excluded from property operating expenses. 

This revenue line partially explains INVH’s impressive NOI margins even as expenses have outpaced rent growth. It explains how, until the most recent quarter, INVH had not posted negative year-over-year FFO growth since 2020. And it explains why, in 2019, when the “Smart Home Fee” was made mandatory, INVH CEO Dallas Tanner told his Senior Vice President, “Juice this hog.”

The Lawsuits

Every large company has lawsuits, and reading the complaints can paint an overly sinister portrait of a company just engaging in normal business activity. However, INVH’s court dockets show almost an institutional mandate to push fees on customers that make staying current nearly impossible and to defer critical maintenance and repairs at the tenant’s expense. 

Ranesha Hunter's lawsuit against 2018-1 IH Borrower LP, an entity controlled by Invitation Homes, illustrates many of the systemic issues that led to the Federal Trade Commission's (FTC) action against the company. 

The complaint begins with a dispute over a water leak in Hunter's rental property. When Invitation Homes failed to repair the leak promptly, it resulted in an unusually high water bill. The company's refusal to credit Hunter for the portion of the bill caused by their neglect led to a series of events that mirror the FTC's findings of deceptive and unfair practices.

One of the key issues highlighted in both the individual complaint and the FTC settlement is the use of hidden fees and deceptive pricing practices. In Hunter's case, Invitation Homes allegedly locked her out of the payment portal when she disputed the water bill charges. 

This action prevented her from paying rent, leading to late fees and the accumulation of debt.  The complaint details multiple dispossessory (eviction) actions filed by Invitation Homes against Hunter, often including fees and charges that had been previously settled or dismissed by the court. These dispossessory actions are intentionally scary for renters. They show up on credit reports and make finding alternative housing extremely difficult. 

Hunter's experience with security deposits also reflects issues addressed in the FTC settlement. The complaint alleges that Invitation Homes continued to demand payment for amounts that should have been resolved through previous agreements and court orders. This mirrors the FTC's finding that the company unfairly withheld tenants' security deposits, including charging for normal wear and tear or pre-existing damages. The settlement prohibits such practices and requires Invitation Homes to establish fair policies for handling security deposits.

The lawsuit describes Invitation Homes' alleged practice of "stacking" penalties and fees, refusing to remove them even when the tenant successfully challenged them. 

One of the most striking parallels between Hunter's case and the FTC settlement is the allegation that Invitation Homes continued to pursue eviction actions and demand payment for amounts that had been settled or dismissed by the court. This persistence in seeking unjustified payments, even in the face of legal rulings, demonstrates the systemic nature of the problems addressed by the FTC.

The complaint cites Invitation Homes' parent company boasting about a 22% increase in earnings due to its system that "track[s] resident delinquency on a daily basis" to assess late fees and process evictions automatically. This automated approach to fees and evictions, without regard for individual circumstances, is precisely the type of practice the FTC settlement aims to curtail.

Another suit, filed in the U.S. District Court for the Southern District of Florida, alleges that the company's negligence led to a severe mold infestation that forced Keisha Johnston-Gebre and her minor child out of their Weston, Florida home and caused significant health issues.

Johnston-Gebre's complaint paints a picture of corporate indifference to tenant welfare. According to the lawsuit, she first suspected mold in her rented home in 2021, four years after moving in. A professional inspection in June 2022 confirmed her fears, revealing mold in air vents, kitchen, floors, and bathrooms, and extensive water damage throughout the house. The inspector noted that the roof was leaking and mold concentration in the air was abnormally high.

Despite repeated complaints and the damning inspection report, Johnston-Gebre alleges that Invitation Homes failed to take any action to remedy the situation. This inaction, she claims, led to serious health consequences for her child, who developed mold-related illnesses, including asthma and rhinitis. A physician confirmed these conditions were directly caused by mold exposure and recommended immediate removal from the home.

"Despite having the financial resources to address the mold problem, Invitation Homes chose not to do so," said Faudlin Pierre, attorney for the plaintiffs. "This demonstrates a callous disregard for tenant health and safety that goes beyond mere negligence."

The lawsuit brings six counts against Invitation Homes, including breach of contract, constructive eviction, nuisance, negligence, Florida Residential Landlord and Tenant Act violations, and retaliatory eviction. Johnston-Gebre is seeking various forms of relief, including compensatory and punitive damages, return of her security deposit, and attorneys' fees.

INVH has traditionally settled these cases in lower courts, but as tenants press the issue and these cases rise through the court system, it has become increasingly difficult for regulators to ignore them. 

The $48 million FTC settlement creates a fund to reimburse renters and includes an agreement to cease these practices going forward. But can INVH, considering the importance of fees and minimal capital expenditure to their margins, actually change their practices without the true economics of SFR hitting their valuation? 

Should the 15-20% fee revenue shrink to a normalized 5-10%, would NOI margins be closer to 55% than today’s 67%? Does 18x FFO seem correct for a company with an expense line growing faster than underlying rents if the workhorse of additional fees suddenly comes under regulatory pressure? These questions seem to be going unasked by most investors.

The Path of Destruction

Were it not for Helene, these questions may have lingered, but the storm’s path cut through a meaningful portion of INVH’s portfolio geographies (20-30% by revenue). The company was already facing higher property tax and insurance costs, and the storm's aftermath threatens to exacerbate rising property expenses, potentially exposing the extent of the deferred maintenance on properties.  

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After a year in which Apartment REITs outperformed the S&P 500 and REITs generally outperformed the S&P equal weight, Morgan Stanley and Goldman Sachs have come around to the view that low-leverage listed real estate might be a good play going into a Fed cutting cycle. 

Morgan Stanley on the Historical Analogs

As MS points out, REITs have been in a five-year malaise, underperforming broad equities by more than 10% annually. They blame COVID, which significantly altered demand for certain real estate types, and rapidly rising rates, which depressed transaction volumes and valuations. Those doldrums are a major contributor to the longer lookback, showing a +2% drag to the S&P, swinging a 70 basis point lead from 2019 to today’s lag. 

As expected, the broad indices' red-hot performance has created a sizeable valuation divergence. Should REIT valuations revert to their long-run valuation relationship with equities, the upside is 30-40%. MS, 

“Interestingly, this outperformance of broad U.S. equities versus REITs has resulted in a significant valuation discrepancy. Over the past 20 years, U.S. REITs have traded at a +0.5x premium to U.S. equities on a multiple basis, but today U.S. REITs are trading at a -4.3x multiple discount. Bringing this relationship back to par would imply between 30-40% of relative outperformance of REITs compared to equities.”

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Published ahead of holiday weekend, removing the paywall and offering $100 off annual subscriptions. I am planning on upping my publishing cadence into the Fall without more timely commentary on the listed real estate market.

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Long-time readers of L.E. will be familiar with my affection for Marty Whitman. His approach to value starkly contrasts with the Graham/Dodd/Buffett dogmas that have come to dominate the discipline. Whitman rejected what he called “income statement primacy,” the belief that the ability to generate accounting earnings was the ultimate judge of value. Instead, he took a credit and balance sheet approach and believed that many companies were in the business of “corporate wealth creation.” Corporate wealth creation includes many “asset conversion activities” like sales, refinances, and M&A, which create shareholder value independently of income statement flows. This is intuitive to real estate investors for whom real asset ownership provides a toolbox of wealth-creating transactions such as recapitalizations, joint ventures, and structured finance solutions.

This week, Plymouth Industrial REIT announced a joint venture with Sixth Street involving a portfolio of Chicago industrial buildings. JVs are common in REITs, but the Sixth Street deal is more complex. Its size is also notable, providing the $1 billion market cap with up to $500m of liquidity to acquire assets. This form of asset conversion is precisely the type that Whitman described as creating corporate wealth. Moreover, it reflects how private equity and listed real estate are interacting outside of the big take-private transactions Blackstone has engaged in. Private equity uses JVs to create more leveraged real estate exposure. At the same time, public REITs can unlock a portion of their asset value to grow without below-NAV equity issuance or taking on expensive debt.

The Deal

PLYM is contributing its Chicago area assets to the JV at a 6.2% cap rate on $22 million of net operating income, or $356 million. That will be financed at 50% LTV upon close. Of the 50% equity, Sixth Street is contributing $116 million or 65%. Plymouth plans to use a portion of the proceeds to pay down $67 million of existing secured debt, while their proportionate share of the new debt ($178 million) will equal $63 million, making the transaction roughly leverage neutral. 

PLYM’s Chicago portfolio represents the REIT’s largest geography both by square footage and annualized base rent, accounting for nearly 20% of each. PLYM’s cost basis is approximately $260 million on these assets. The combination of the new equity and mortgage debt creates $294 million of total proceeds, recovering all of PLYM’s basis in the assets. The new JV will also generate management fees of $1.5 to $1.8 million per year, assuming a 1% fee on equity.

Value Creation

This structure generates three forms of value creation: An attractive cap rate mark, a higher equity yield, and, crucially, non-dilutive capital with which to acquire more assets. 

Attractive Cap Rate Mark 

The market implied cap rate for PLYM in the lpw-7s, so the 6.20% mark on 20% of the portfolio suggests some discount to NAV in the current share price. Of course, the deal's complexity, including a step-up coupon preferred and warrants, does not make this valuation a clean comparable for the assets' actual market value. 

Sixth Street is getting some additional optionality and yield that a fee buyer would not, and presumably, those opportunities are an extension of the value they are willing to put on the assets. The true value of the assets would need to be adjusted for the option value of the preferreds and warrants. 

The 5.9 million square feet implies a per-square-foot price (PSF) of $60.34, so what looks like a 14% value increase from cap rate compression ($22 million NOI / 6.20% vs. 7.04%) is really only a 6% premium to the implied PSF. Asking rents in Chicago as of Q4 2023 were $6.63. At a 70% NOI margin, the mark-to-market value is closer to the current implied cap rate. 

Nonetheless, I see the value in creating a strong headline cap rate figure, even if the financial engineering obscures it. 

Improved Yield on Equity

While Plymouth is selling off some cash flow, it actually somewhat improves yield even while keeping the overall leverage profile unchanged. Assuming stable FFO margins and factoring in an 80% margin on a 1% management fee, the cash yield improves by 230 basis points compared to being fully consolidated with no management fee.  

Moving assets to a JV with something closer to a private equity structure is relatively standard in REITs, especially for development assets. The incremental fee revenue has a higher margin than the cash flow you give up, boosting yields. It also frees up the balance sheet to make acquisitions. Essentially, PLYM sold 65% of the asset but only 57% of the revenue. 

Non-Dillutive Capital

The real beauty of this deal is that PLYM gets access to capital without having to issue equity immediately. The JV allows them to unlock a portion of the Chicago Portfolio value to pay down debt and, more importantly, acquire assets with attractive yields. 

At 35% ownership, the JV will be unconsolidated, yet in the press release, management affirmed its full-year guidance of $1.88 to $1.90 per share FFO. By my calculation, the Chicago assets accounted for around $0.30 of FFO; at a proportionate share, they will only contribute $0.11. How is the $0.20 FFO being bridged? Presumably, by new acquisitions. 

Plymouth has already earmarked some of the new capital for its recent $100.5 million acquisition of a Memphis portfolio purchased at an 8% cap rate.  Plymouth has identified additional acquisitions with above 6% cap rates, lease-up upside, shorter WALTs, and more embedded mark-to-market rent increases.  The Memphis portfolio alone should contribute around $0.10 to FFO. Plymouth needs a combination of NOI growth in its legacy portfolio and another $100 million of acquisitions to hit guidance -- something they apparently feel confident about. 

What Does Sixth Street Get?

This all, of course, comes at a cost. The relative value of which will only be known in time. Sixth Street’s $140 million preferreds have a 7% yield split between a 4% cash pay and 3% PIK; those step up in Year 5 to 8% and 4%, then again in Year 7 to 12% and 4%. As John Kim of BMO writes,  

“This is deja vu for PLYM, which recently eliminated the overhang from Series B Preferred shares (which were convertible to equity). In this case, the overhang is the potential increased costs…Even if PLYM were to redeem before the fifth anniversary, the implied cost would exceed 7% per annum, as Sixth Street is entitled to a 35% total return inclusive of dividends.”

This deal implicitly assumes that rates will fall, allowing PLYM to exit the preferreds before their costs rise. As Year 5 comes into view, the overhang from preferreds could again be an issue for PLYM.

Sixth Street also gets 11.76 million warrants with strikes at $25.25, $26.25 and $27.25. These are, in effect, forward purchase agreements of stock. Sixth Street likely sees the acquisition pipeline as growing FFO and, in turn, share price. If PYLD were to deploy $400 million into 6.5 cap assets, undiluted FFO per share would increase by approximately 20% (~$0.30). That said, the prospective dilution from the warrants qualifies as a contingent cost of capital.

Is this a good deal?

Time will tell, but I understand the logic and motivation of both parties. REITs are structurally equity issuers since their capital allocation is constrained by the dividend requirements. Absent distress, management is loath to issue equity at what they believe is below NAV.

Similarly, debt capital markets are not currently offering a great alternative. The REIT rally has given some companies an opening to issue equity, but debt offerings are pacing below 2023. It is worth noting that $4 billion of this year’s equity issuance is attributable to the Lineagem IPO. 

Yet, REITs must grow and debt-laden private markets are offering accretive acquisition opportunities. These structured JVs free up capital to make acquisitions without committing the balance sheet sins of poorly timed debt or equity issuance. 

For its part, private equity can use its more patient (read: illiquid) capital to create real estate exposure that more closely matches its target leverage profile by structuring PIPEs into assets already managed at scale. 

Knowing the cost of this capital ex-ante is difficult, if not impossible. This added complexity comes with the risk of growth being more punitively discounted. For REITs, greater complexity rarely leads to valuation premiums for all but the largest players.

Overall, I think the Plymouth-Sixth Street deal makes sense, and if the market disagrees and pushes the stock price further from the warrant strikes, it could be an attractive opportunity. Further, we should expect more deals like this as transaction volume picks up and the ever-looming “maturity wall” slowly dispenses opportunity.

A debate in multifamily real estate quietly rages: Was sunbelt growth an anomaly? The migration patterns are clear. Substantial numbers of people left gateway coastal markets and headed to the greener (and cheaper) pastures of America’s Southeast, Texas, and Arizona. The reasons given for this demographic reshuffling included political narratives, an evolving remote work economy, and less volatile prospects than “company towns” like Los Angeles, San Francisco, or New York, where growth tends to track closely with media, technology, and finance. 

Despite the desire to assign these trends to large paradigm shifts, the Bank of America Institute presents a far more banal picture. Most of the migrants were young people who moved to these places overwhelmingly because they were simply cheaper. 

Yes, it turns out that those “fleeing” California were less millionaires concerned about progressive policies and more likely bartenders who no longer wanted to live with four roommates. That has implications for the sustained growth of Sunbelt markets. There is an argument that young, creative types may imbue these markets with the cool factor needed to attract high earners. Still, recent growth has not been powered by the high-earning demographics that create sustained demand.

While this may be a case of mistaken causality, the underlying trend is itself telling. Housing is most people’s largest non-discretionary expense, and when it gets too burdensome, they are forced to move somewhere where the burden can be more easily shouldered. Despite the wave of supply coming to these markets, rents are still high and rising. Bully for those owners…for now, but they may be undermining their relative affordability and, thus, their growth.

Both Gen Z and Millennials are delaying household formation. Increasingly informal work arrangements mean these new residents are less likely to have put down roots.  If rents in these markets no longer represent a relative value, they will migrate to new geographies. Overall, I am still bullish on the multifamily space in public markets, but that is largely a value, not growth-driven, view.

Zooming out, the Midwest offers a compelling case assuming wages stay stagnant, housing remains unaffordable, and young people accept a more rootless existence. Bleak? Perhaps, but overall, this view is more grounded than fantasies about cultural or political shifts driving migration. I am particularly bullish on the upper Midwest, specifically Centerspace . 

Centerspace

Centerspace is perhaps the only listed REIT that offers targeted exposure to cheaper but still economically stable Midwest markets. 

With a market capitalization of just over $1 billion, the REIT owns 72 apartment communities with 13,000 units. Apartments in Denver, Minnesota, and North Dakota make up most of their revenue. The portfolio-wide average rental rate is $1,566 per month. This compares favorably with the closest Sunbelt operator, NextPoint Residential’s $1,517 monthly rates. NXRT, also around $1 billion in market cap, owns Class B properties in some of the hottest markets in the country. NXRT provides mid-point rent growth guidance of 2.30% versus 3.75% guidance from CSR. When you look at valuation, these profiles are trading at very different levels1. 

The 166-basis-point 68-basis-point implied cap rate spread between CSR and NXRT over-indexes the lower growth of CSR’s markets versus the Sunbelt. While no one is suggesting that Omaha or Minneapolis are the next Nashville or Austin, the foundations of growth in these markets clearly have more upside. Rent growth in Grand Forks, North Dakota, an hour north of the relative metropolis Fargo, compared to Nashville, Tennessee, tells the story. 

On a rent-per-square-foot basis, Grand Forks averages $1.12 versus Nashville’s $1.78. A 60% premium to live in the Home of Country Music? Did some wealthy New Yorkers find Nashville’s southern charm beguiling enough to move there post-COVID, sure, but again the statistics suggest that the bulk of migration-driven rent growth came from younger, budget-constrained residents making a quality-of-life tradeoff. 

What areas like Grand Forks lack in name-brand appeal, they compensate for in affordability and economic stability. North Dakota's unemployment rate is 2.6%, compared to the national measure of 4.3%. Rent-to-income ratios in Centerspace markets are 21%. 

Operating Advantage of Smaller Markets

Operating in these markets has other benefits for real estate owners. On their second-quarter earnings call, Equity Residential’s CEO Mark Parrell said property taxes accounted for 45% of their expense load. Centerspace’s real estate taxes account for just 11% of total expenses. These markets also have slower expense growth, which is especially important for SMID Cap REITs with less inherent operating leverage. CSR has the top-line growth of a smaller REIT with the expense growth profile of its large-cap competitors. 

Cost of Capital and Leverage

For better or worse, CSR is leverage-averse. It has run less than 1x Debt/Equity since 2016. Its ~7x Net Debt/EBITDA looks puritanical compared to NXRT’s 10x or Elme Communities’ 9x. CSR uses roughly an even mix of secured and unsecured debt. In the second quarter, the company issued shares 540,000 shares, raising $36 million to reduce the floating rate portion of their balance sheet to less than 2% of total debt, in turn reducing their blended cost of debt capital to 3.49% from 3.62%. Centerspace CEO Anne Olson, 

“During and subsequent to the quarter, we issued shares on our ATM with proceeds of approximately $37 million at an average gross price of $69.60 per share, which we are using to reduce leverage. These sales are a positive contrast to our first quarter stock buybacks at an average of $53.60 per share.”

This share issuance should also be accretive to FFO, adding $0.04 in Q3 when the interest savings flow through, accounting for the increased share count. Management suggested they may pay off the remaining $10-$20 million of floating debt. 

This patently Midwestern prudence necessarily constrains its returns on equity and, in turn, its multiple. CSR is fundamentally less levered to interest rates, both by virtue of its stable underlying markets and its conservative balance sheet. Compared to significantly more levered NXRT, CSR has a higher return on its assets, but its unwillingness to press its leverage reduces returns to equity.

This creates a predictable but important impact on equity volatility. Centerspace is markedly less volatile than NXRT. Without too much of a digression, real estate investors who invest across public and private markets should note that higher leverage always increases equity volatility, whether those prices are marked daily by buyers and sellers or not. 

This lower volatility means that underwritten returns driven by fundamental gains in NOI are higher fidelity than more leveraged alternatives. The volatility leverage creates means you have less visibility on your exit multiple, whether you are investing publicly or privately.

Outlook & Valuation

The thesis for CSR relies on relative top-line acceleration that moves the multiple closer to the comp set. If CSR can continue to print 3-5% rent growth as Gateway and Sunbelt markets go flat, the multiple should normalize despite the reduced leverage. 

I have thus far not focused on supply dynamics. There is a well-understood narrative of increasing supply in the Sunbelt that will constrain rent growth over the next two years. The multiples of those REITs have begun looking beyond that supply wave and assuming a re-acceleration of growth after new apartments are absorbed.

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Even if you are unfamiliar with Starwood’s sprawling real estate empire, you are likely familiar with its Chairman, Barry Sternlicht. A too-tanned Sternlicht has been a fixture in financial media, calling for the Fed to cut rates practically since they began raising them. This is self-serving to a large commercial real estate owner like Sternlicht. His 32-year-old firm has around $115 billion of assets under management; by some measures, it is the largest owner of apartments in the U.S. 

Nested within this real estate giant is Starwood Property Trust -- a publicly traded mortgage REIT with a market capitalization of $6.7 billion. It is important to distinguish between your “plain vanilla” mortgage REIT and STWD. Most Mortgage REITs (MREITS) are relatively straightforward pools of real estate loans leveraged with various forms of debt. The Mortgage REIT moniker can be an albatross for listed entities. 

First, Mortgage REITs are “out of mandate” for many managers, especially passive strategies. The S&P 500 contains zero mortgage REITs. That lack of “natural” buyers means that MREIT flows are relegated to sector-specific vehicles or bold active managers. Secondly, the relative opaqueness of MREITs and the interest margin nature of the core business model means that there is little if any, reason for an MREIT to trade a premium to book value. Finally, their stubbornness to exhibit multiple expansion and the high portion of returns that come from dividends make them less attractive to “fast money” pools of capital.

The level of sophistication for MREITs runs the gamut from “six guys with a Bloomberg” to massively complex firms with diverse business lines. Starwood is the latter. In some ways, it more closely resembles an alternative asset management firm than an MREIT. Its four business lines include commercial and residential lending, infrastructure (energy) lending, special servicing via its captive ownership of LNR, and a property portfolio of affordable housing and medical office buildings. On balance, traditional CRE lending accounts for 65% of distributable earnings, but the other 35% is exposed to unique economic factors beyond simply CRE credit spreads. 

I don’t wish to regurgitate the 10-K here; Starwood believes it has unique competitive advantages in each of these spaces and, further, that these units, or in their parlance “cylinders,” ultimately complement one another. It is not a stretch to see how the REIS segment, which originates, invests, and services CMBS, might be valuable to a senior originator. The property portfolio of Medical Office and Affordable housing is itself unusually housed within a mortgage REIT. Infrastructure lending is also an outlier category that obscures the traditional MREIT metrics. This is all to say that coming up with a valuation is a challenging prospect, one for which STWD’s investor relations give little guidance.

Price to Book Value

With such a complex and varied operation, the potential pencil-sharpening that could be done on both sides of the balance sheet is nearly endless. The sell side, IR and most investors look to a simple price-to-book method to arrive at some value assessment for MREITs. Using that basic heuristic, STWD’s shares are experiencing the effects of CRE’s dour outlook. 

That said, US office assets represent just 11% of the total asset base; across commercial lending, the book is around 60% LTV. CEO Jeffery DiModica said on the first quarter call, 

“Our largest property type multifamily, which is 21% of our company's assets, has an average remaining term of 2.7 years and continues to experience year-over-year rent growth with same-store rents up 3.4%.” 

Interestingly, STWD did no new loan originations in Q1 but issued $600 million in senior unsecured notes at 7.25% -- while this issuance raised the cost of debt, it brought the company’s total availability capital for lending to $1.4 billion more than double the $635 million available at the end of Q1 2023.

There is an argument that newly originated real estate debt is among the best risk-adjusted returns available in the CRE space today. STWD stands to be a liquidity provider as refinances, and new acquisitions occur at attractive valuations ahead of a potentially falling rate environment. 

The analyst looking to price-to-book for valuation needs to assess the likely path of originations and then the market’s propensity to put at least a 1x multiple on net assets. This approach works well enough, but in practice, it becomes a Keynesian Beauty Contest, with the multiple reflecting the market’s view of the portfolio’s credit and the issuer itself. 

At the end of Q1, the share price represented 0.96x of undepreciated book value. Undepreciating book value helps a bit, but this also includes roughly $1.70 per share of “Current Expected Credit Losses” CECL, which I will address shortly. 

The “Excess Spread” approach

In structured or asset-backed finance, the excess spread simply represents the difference in yield between the underlying pool of assets generate and the yield the security pays. Typically, this is the excess cash flow available to the instrument's equity tranche. There is no way to truly simplify the model for Starwood; the organization and capitalization are simply too complex. There is frustratingly little middle ground between slapping a price-to-book ratio on it and building a full three-statement model. The idea of excess spread, however, does provide a useful framework. 

Again, as an STWD equity holder, you are mostly in the game for the dividend, its potential growth, and the thin hope of multiple expansion. I believe the aforementioned complexity takes trading a sustainable premium to book value off the table. With that, the analyst should be most concerned with the spread the dividend offers to other yield opportunities and, crucially, how well it is covered by the business's core investing functions. 

To that end, I look at each business unit, its disclosed yield, and the overall leverage the company employs: 

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Summary

The constantly looming threat of the “Wall of Maturities” for commercial real estate debt presents an opportunity for listed REITs. That opportunity comes largely from the cost of capital advantage provided by low-rate corporate-level unsecured debt. Public REITs deftly used low rates to buttress their balance sheets with relatively long-term fixed-rate debt during the last Fed cutting cycle. Lower-cost debt financing presents public investors with two key questions:

• Does the future refinancing of this debt create a potential headwind for FFO and, in turn, equity multiples?

• Are there attractive opportunities higher in the capital stack if stagflation is the prevailing macroeconomic thesis? 

I am going to focus on investment-grade REIT bonds. There are no doubt some juicy special situations lurking in high-yield REIT debt, but they are highly idiosyncratic (mostly office) and hard to assess on a sector level. All data is aggregated from the Bloomberg Investment Grade US REIT Index (I00689US Index). This index excludes Telco/Tower REITs.

Issuance

As rates fell, REITs ramped their debt issuance, raising $66 billion in debt capital over 2020 and 2021 at an average coupon of 2.64%. 

Residential and Retail REITs have the most debt outstanding, with coupons between 3.50% and 4.00%. These sectors are also the beneficiaries of demand tailwinds and the capital cycle. Retail space is structurally undersupplied after a decade-plus of tepid construction.  According to CoStar, 

“Over 80% of retail spaces listed on the market during the past year were leased within six months of first becoming available, while 98% were leased within nine months. This is the most rapid pace on record and is more than double the average from the past decade.”

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Summary

At the index level, REIT dividend yields look uninspiring, but digging a bit deeper reveals market expectations for future cash flow growth. Using a simple framework and an “Expectation Investing” approach can help rationalize what’s really going on with the underlying property portfolios. Today, I take a look at:

• The Core U.S. REIT ETF yield spread against treasuries

• Public Storage’s post-growth outlook

• Veris Residential’s Northeast Multifamily transition

These will all be evaluated through the lens of dividend yield, a surprisingly important and unfairly antiquated financial metric. REITs are ultimately pass-through vehicles, which means dividend growth is far more than a simple capital allocation decision. Dividend yields can cut through complexity to provide investors with a long-term perspective on expected returns.

"The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?"

-Michael Mauboussin

Rising rates, or as Jim Grant says, “Interest rates we can be proud of,” considerably change investment decision calculus. Regardless of whether the subject is equity, fixed income, or private investment opportunities, investments can be evaluated using the basic bond math inputs: Yield, Credit, Duration, and Convexity. Yield is what you will get paid, credit is if you will get paid, duration is when you will get paid, and convexity considers “how” you might get paid, either through income or capital appreciation as it relates to changes in interest rates. If this is a bit obtuse, don’t worry; I will focus on yield, the simplest of these inputs, and REIT dividend yields specifically. 

Because such a substantial portion of REIT returns comes from income, the going-in cash yield of REITs is an undeniably important consideration for investors. Since 2014, over 70% of the total return of REITs has come from dividends. 

Over that period, dividends grew by roughly 3% per year, while payout ratios, as measured against Funds from Operation, stayed relatively flat in the 60-75% range. By these measures, REITs have lived up to their defensive reputation in portfolios, even as the broader market focused on the inflating terminal values of tech companies who eschewed any cash shareholder returns. Today, rising real rates have made money dearer; as a result, cash returns are again coming into vogue. 

However, when viewed against the yields available on 10-year US Treasuries, REIT dividend yields are at the widest negative spread in the past decade. On average, the capitalization-weighted REIT index has provided a dividend yield 166 basis points wide of the 10-Year Treasury. Today, that spread is 100 basis points to the negative. 

The annualized dividend of is 2.24% versus 4.4% available via the safety of the US government benchmark. If shown only this metric, most investors would reasonably assume REITs were overvalued. Surely, an investment whose returns are so reliant on income must offer a higher yield than the risk-free alternative. However, such a view would be overly simplistic when evaluating the overall opportunity in REITs.

REITs have a mandated return of shareholder capital to maintain their tax status. 90% of taxable REIT income must be distributed. While this taxable income benefits from a sizable depreciation shield, REITs still pay out roughly 70% of their cash flow. That cash flow grows by the levered return on their investments. On a capitalization-weighted basis, REITs have grown dividends by around 5% over the past 5 years, while the top 20 market capitalization REITs have grown their dividends by over 8%. 

REIT Market Capitalization & 5-Year Dividend CAGR

To put this into a valuation context, we can use the somewhat simplistic Gordon Growth Model (GGM). The model values equity by looking only at the perpetual value of the dividend and factoring in its long-run growth.

For example, Public Storage currently yields a relatively high 4.36% on a per-share price of $275. PSA’s 5-year dividend growth is a bit misleading since they held the dividend flat at $8 per quarter from 2016 to 2023 before raising it by 50% in Q4 of 2023. The simplicity of GGM helps us conceptualize value over a longer time horizon. For our purposes, we will hold PSA’s near-term dividend flat. 

Using PSA’s FFO Yield as a cost-of-equity starting point and assuming long-run dividend growth falls in line with the inflation (~3.50%), the stock looks fully valued on a pure income basis. Public Storage trades below a 5% cap rate, making accretive acquisitions challenging, and like all storage operators, they have pushed rents aggressively in the inflationary environment. This is against a backdrop of ramping supply across markets. Same-store rents are falling, and Q1 FFO declined by 1.2%. It requires a degree of creativity to envision how a behemoth like PSA might meaningfully grow the dividend above inflation. 

Obviously, such an analysis is not a basis for an investment decision and does not directly address the overall sector’s negative spread to Treasuries. To answer those questions, you have to invert the above reasoning. REIT yields are not low because investors are expecting flat dividend growth; higher rates have made the cash return more precious, and, in fact, the market is reflecting their expected growth. 

Holding treasury yields constant, REITs must increase their dividends by 20% over the next 5 years to return to their 10-year average spread to treasuries. Taking 100 basis points off the 10-year, the required dividend growth drops to 7.40%. Plugging those assumptions into a 5-year GGM, implied long-run REIT dividend growth settles out to ~5.8%. All we have done here is back-solved for the long-run dividend growth rate, assuming a fall in yields and a return to the historical spread.

Long-run dividend growth above 5% is a high bar. It assumes not just structurally higher inflation but also that REITs have the pricing power to grow rents above inflation while stabilizing costs. Using these assumptions, it is admittedly hard to argue that REITs are substantially undervalued at the index level. However, focusing on pricing power and reinvestment potential reveals opportunities at the individual security level. 

For example, Veris Residential VRE 0.00%↑ is an owner of +7,000 apartment units across New Jersey, New York, and Massachusetts. Veris just recently reinstated a paltry 1.59% dividend yield. That is partially the result of a transition from their life as Mack-Cali, predominantly an owner of office real estate. In 2021, they began liquidating office assets and transitioning to a multifamily focus. The last of those office assets was disposed of in the first quarter of 2024, but they are still working on cleaning up the balance sheet. Full year FFO guidance is $0.50-$0.54 cents per share, the Company’s $0.24 annual dividend equates to just a 45% payout ratio.

What is key to understanding about Veris, especially relative to Sunbelt multifamily, is that incomes are very high relative to rents, and renters face a more dire home affordability market. In Q1 of 2024, the company was able to achieve 7.2% rent growth on renewals and 2% rent growth on new leases.

Management is guiding to 2.5%-5.0% NOI growth in 2024. Backing into mid-point 2024 NOI guidance, the current valuation puts the implied cap rate at ~5.5%. The ability to continue to push rents in these markets means that the field of vision for acquisitions is larger than for Sunbelt multifamily, where near-term rent increases are less certain. Veris has both pricing power and a potentially active acquisition environment.

Holding FFO flat but assuming the payout ratio grows to the 70% benchmark over the next five years before falling in line with inflation, Veris looks significantly undervalued.

While the Gordon Growth Model is a gross oversimplification, in the vein of Michael Mauboussin’s “Expectations Investing,” it provides an insight into the core underlying assumptions required to make today’s prices “right.” When you compare the dividend outlooks of Public Storage, Veris, and REITs at large, it starts to cast the index-level dividend yield in a new light. The table below summarizes those required assumptions. The REIT index needs both impressive near-term and long-term growth. Public Storage’s current price and yield reflect muted expectations supported by the data, while REITs like Veris have low hurdles to clear and fundamental tailwinds on their way to a full valuation. 

Are there more PSAs or VREs in the REIT index? The abuse of cap-weighted indexing means that PSA’s $49 billion market cap relative to Veris’s $1.3 billion market cap certainly skews the blended result. In fact, VRE does not even earn a position in IYR.

The intelligent listed real estate investor will find it useful to gauge dividend yields against property portfolios with better pricing dynamics and longer investment runways. The mind may even drift to well-capitalized office REITs like BXP (6.93% dividend yield, 53% payout ratio), who are looking at a landscape of potentially double-digit yielding acquisitions.

Deep discounts to NAV are a woeful approach for REITs compared to high visibility on cash flow growth. Don’t mistake low yields for high implied multiples. 

Further…

Turns out I write a lot about dividends, thanks to

Disclosures

This report is intended to be educational and entertaining, not investment advice. Do your own due diligence. I make no representation, warranty, or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report.

Any assumptions, opinions, and estimates expressed in this report constitute my judgment as of the date thereof and are subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved. Lewis Enterprises is not acting as your financial advisor or in any fiduciary capacity.

At the time of this writing, I potentially own shares in these companies via ETFs. My own positioning is subject to change without notice.

There is now broad recognition that we have traded economic dynamism for only marginally improved material conditions. The implicit bargain was that Americans could move up the intellectual value chain by doing the nasty bits of the economy elsewhere. If AI is truncating that chain, then policy and capital will respond to protect American interests. It is hard to overstate what a significant departure from global consensus things like the China tariffs, IRA, or CHIPs Act genuinely are.

The US is on the path of reindustrialization. This trend has obvious real estate implications, but none more significant than in the industrial sector.

I will focus on comments from Prologis over the past several weeks, both from the Bernstein conference and NAREIT. I have written about Prologis before; as the largest industrial owner in the market, their view of the changing landscape is valuable and has implications for other listed operators in the space like , and . 

From a macro standpoint, industrial real estate looks well-supplied, possibly even oversupplied. Stephanie Rodrigues of Colliers states,

“More than 85% of these projects were built on spec. Demand began to normalize in early 2023, averaging 52M SF over the past five quarters, or about 80% of the pre-pandemic average."

Those high-level metrics belie a more nuanced landscape where property type and location are hugely important. 

Comments and notes combine commentary from NAREIT and the Bernstein conferences. 

Nearshoring and Mexico

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