Managing Through the Rear-View Mirror

Those who do not know history are doomed to repeat it.

It is important to maintain a healthy respect for past performance of companies and assets, but to do so in the context of the future.  Far too often companies will buy assets using underwriting that essentially just extrapolates recent performance.

Investor’s Real Estate Trust (IRET) just spent an exorbitant amount of capital acquiring a multifamily property in Denver.  Apartments have done supremely well in Denver with rapid rental rate growth and even faster appreciation.  It has become perhaps the most overpriced multifamily market in the country with exceedingly low cap rates.  At market NOI multiples, the growth of recent years would have to continue for a few more years to make such a purchase worth it.  We find this unlikely as rents are already so high as a percentage of household income.

Terreno (TRNO) is using a similar strategy with warehouses in LA.  Acquiring at 3%-4.5% cap rates requires the explosive growth of the past to repeat itself just to make an acceptable return.

In both cases, the companies are managing through the rear-view mirror.  They are answering the question of what assets would have been great to buy 5 years ago rather than looking at what is great to buy now.  These are not the sorts of companies we invest in.

We feel the market is making a similar mistake.  Momentum investing is perpetuating valuation rifts as capital pours in to the names that have already done well.  Perhaps this is for end-of-year window dressing or possibly the more rational reason of tax loss selling.  Regardless of the etiology, the value embedded in certain REITs has become deep and we are downright excited about the investment opportunities that lie ahead.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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