Thoughts on my last letter

Written by Tyler Kastelberg

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Happy Sunday!

Thanks for all of your replies to last week’s letter!

We hit a massive milestone at Bullpen in October – more than $1 million in annualized GMV (gross marketplace volume). Big thanks to our team and awesome customers who have helped us get here! 🥳🎉

This week I’m going to do something a bit different and share a few responses that I received from last week’s letter (on arbitrage between REITs and public market real estate – you can read it here if you missed it).

A little housekeeping before we get to the main show …

1) If you’re not subscribed but think content like this is interesting, subscribe here. If you enjoy reading this, forward it to two friends who might also find it interesting … sharing is caring.

2) Once again, I’m writing about publicly traded securities. None of this letter is intended to be investment advice, and given my track record picking stocks, you definitely shouldn’t use this information to make trades. 📉

Put your feet up, take a deep breath, and let’s get to it.

Response 1: From Michael Pennington on market cap rate

Interesting thoughts.

I used to analyze REITs actually at a Canadian investment bank, so this is a topic I’ve spent a lot of time thinking about. It’s pretty tough to make an arbitrage claim (“arbitrage” is a term that is way overused too in my opinion) because as you noted, there is the impact of management that might justify a premium or discount to NAV. ALSO, there is the fact that public securities trade more frequently, which means that maybe the real, most current cap rate is the cap rate implied by the price the REIT units are trading at – and private values have just yet to catch up.

I think Manoj is right about the disconnect between public and private real estate investors. I think there is more that could be done to bridge that gap, from a research perspective, benefitting both types of investors.

Michael Pennington, Bullpen Freelancer

I bolded the part that I found incredibly insightful. Given the liquidity of public markets, the implied cap rate by a REIT’s stock price may be the best measure of the “market cap rate.” Based on Avalon Bay’s stock price, I calculate an implied market cap rate of 3.6% for their multifamily assets.

Response 2: From a freelancer (who prefers anonymity) on REIT buying opportunities

After working at Prologis for five years, I can say with confidence that the REIT markets MASSIVELY over-estimate the impact of interest-rate risk when valuing REIT stocks. So if you want to make money in that market, be contrarian with respect to interest rate risk. Watch REITs (stock prices) fall when the fed threatens to raise rates and buy. Most of these companies locked in their interest rate ages ago and if you’re investing in the right sectors that will show rent growth, you are more protected against interest rates than you think.

Anonymous Bullpen Freelancer

There is not much to add to that golden nugget … thanks for the pointer @anonymous.

Response/Question 3: From Mark Rios, who has a good question …

Hey, Tyler great email.

How are you pricing in the tax benefits of private real estate ownership vs REIT stock? Mortgage interest, expense deductions, Bonus depreciation, accelerated depreciation, and the RE professional 20% tax reduction all may be included at the asset level in the REIT but should figure into this equation that benefits direct ownership of properties.

Mark Rios, Sponsor & Subscriber to our newseltter

Thanks for the question @mark! Rather than make an educated guess, I’d like to read your thoughts. Reply with how you’d factor in the tax benefits of private real estate ownership when comparing it to purchasing REIT stock.

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