The Top Takeaways from the Big Apple Financial Forum

It was a whirlwind week that started in New York at the NYU REIT Symposium and ended at the Money Map Black Diamond Conference in South Florida yesterday.

Much was learned, many steaks were consumed, and we did our best to lighten the supply of bourbon in both locations.

It was tiring but more than worth the time and effort put into the week.

The REIT event was a little eye-opening.

Most of those in attendance think that the U.S. economy will slow noticeably but not tip back into a recession.

Now, remember these were not just a bunch of people standing around talking about REITs.

It was real estate developers, REIT C-Suite executives, private-equity funds like KKR and Blackstone that own a lot of real estate who have enormous amounts of skin in the game.

They have been dealing with economic cycles, interest rates, and even market cycles for a long time.

They have gotten pretty good at figuring out where we are in the cycle.

With the right timing, you can get not only a bargain deal, but a potentially life-changing investment.

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If they are right, then it is the perfect environment to own REITs.

Slow growth does not mean we are going backward.

Rents will not go down, and occupancy levels will stay pretty high.

Interest rates should stay pretty low as well so the financing backdrop will remain good.

REITs bought at low valuations with solid balance sheets and nice dividends to provide cash flows that help us attain high compounded returns.

The problem for bigger investors right now is pricing.

If real estate projects are large enough to attract widespread institutional interesting, the valuation is a little high by our standards.

Likewise, the biggest REITs are attracting vast amounts of money from giant index funds and Exchange Traded Funds that distort valuations to the upside.

Fortunately, we only have to play when, where, and at a price we want to play while still finding bargains that fit our aggressive long-term approach.

It’s when you are mandated to buy no matter what the price that money gets lost!

I paid close attention when Barry Sternlicht spoke at in the morning.

If you have not heard of Mr. Sternlicht, he is the co-founder and CEO of Starwood Capital, one of the very best real estate operators and deal makers of all time.

He has had several public REITs, home builders, and other real estate related projects, and I am happy to say that I have made money in all of them over the years.

Today only Starwood Properties (STWD) remains listed and if it was to pull back 10% or so you might want to consider jumping into the REIT.

While it is late in the cycle, like us, he is still finding things to do.

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Also, like us, Sternlicht sees more opportunities away from the core big city markets by buying in places like Minneapolis and Portland as well as one-of-a-kind resort property in markets where supply is always going to be limited.

He is a little worried about the concentration of tech in the biggest markets like New York, San Francisco, and Seattle.

He pointed out, “When you look at things like office absorption in this country, 40 percent is like ten companies, they are the office market. It’s not the banks; it’s not the service companies, it’s these tech companies if they hiccup in the public markets, not only does the S&P go down, the real estate markets will go down.”

When asked how he values real estate, Mr. Sternlicht said that he uses the same cash flow and net asset multiples approach that he learned from Neil Bluhm at JMB realty back in the 1980s and has used ever since to build a real estate fortune.

It is worth noting that Mr. Bluhm is still active today and is the managing principal of a real estate private-equity fund, Walton Capital.

On the web site, the firm says that they “target the acquisition of real estate assets at a discount to their replacement cost, or in some cases, below their current market value.”

Does that sound like anyone else you know?

Because of the amount of office space taken up by the Amazons (AMZN), Facebooks (FB) and Googles (GOOGL) of the world if tech goes south it is going to hit the major office markets.

Of course, being me, I hope that this is exactly what happens, so we can buy premier office properties at bargain prices.

Until then, I am quite content with all the special situations and undervalued real estate sectors we have been snapping up over the past year.

Sam Zell spoke to the gathering, and he commented on what is going on at a REIT I mentioned to you last week, Equity Commonwealth (EQC).

He said that when they took over Equity Commonwealth, the REIT owned 145 properties and was running low cash balances.,

Today they only have ten properties and over $2.7 billion of cash on the books with minimal debt.

Now they are looking and waiting for opportunities available at valuations that Zell and his team think are bargain prices.

When they begin deploying this cash and growing cash flow that tax laws that govern REITs will force them to start paying dividends again and the shares should soar when that happens.

As for Black Diamond, it is mostly short-term minded.

While I may be entirely long-term oriented, I had a blast hanging out with the other Money Map folks and meeting some of my readers and subscribers.

I will say that if short-term trading does appeal to you, then Black Diamond should already be on your calendar for next year.

To the Max,

Tim Melvin

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