Deidre Woollard: All right, Fools. It is almost two o'clock Eastern and it's a Tuesday, so that means it's time for the Millionacres Hour where I get to chat about my favorite topic, real estate, with some of our investors and writers and analysts. I'm here with Matt DiLallo. One of the things that's interesting is, today, we were planning ahead of time to talk about big deals, investments, mergers and acquisitions, and then we got breaking news this morning about exactly that, so it's great timing. Hey, Matt.
Matt DiLallo: Hey, how are you doing? I love mergers and acquisitions. This is one of my favorite topics. I'm really excited about the show.
Deidre Woollard: Awesome, because I don't know about you, but I just feel like I'm seeing takeover, merger, joint venture, one on top of each other especially the last three months. Last year was quiet.
Matt DiLallo: Yeah. As a writer that focused on this, this has been great for me. I just had so much [laughs] content just thrown at me. There's just so much money that's out there by institutional investors and they just have so much capital, and then you throw in low interest rates and it's just the perfect storm for this type of M&A activity.
Deidre Woollard: Yeah. You mentioned big money. We're not talking millions anymore. We seem to be talking billions or very close to it when we're seeing these types of transactions. One of the things I want to talk about as we start is, last year, we started caring about all of these capital funds amassing, and then there was nothing and they didn't really do anything. Then now we've seen all of this activity, I think some of that is just pent-up demand, but why else is this happening?
Matt DiLallo: A lot of what happened last year is companies didn't know what the price of things were and that's what drives them. They need to have buyers and sellers agreeing. With so much dislocation in the market, sellers thought that something should go for one price and buyers were obviously looking for bargains. Now that more deals have come through the pipeline, they have a firm idea of what values are in the marketplace. That's just making it easier to do more deals as you can benchmark it against this other deal and, okay, this is a good price and let's sign on the dotted line. It's really helped just unleash this floodgate of deals.
Deidre Woollard: I think you're right about price. I think one of the things that happened is that at least for the first part of last year, a lot of people were anticipating a dramatic drop in commercial real estate prices. So there was a lot of waiting on the sidelines, waiting for that moment when things were going to drop. There were going to be loans in default. There was going to be an opportunity strike. It never came along, and so I think some of this too is just capital realizing like we're waiting for something that may or may not ever happen.
Matt DiLallo: Yeah, and you see that in a residential housing market. Personally, I was looking to buy a second home last year and I was waiting for prices to drop. I thought, oh, this is going to be a great opportunity to buy a vacation home as an investment, and prices just kept going up, and that just fed the market more and more, and we saw that in the commercial side. The federal reserve and bankers, they just threw so much money at the problem which never happened before. They usually let the market correct, and when they didn't let the market correct, everybody's like, okay, this is not going to collapse, I'm not going to get these great deals. It was just a surprise because this is not how it usually happens.
Deidre Woollard: Let's talk about this breaking news that came out this morning. Columbia Property Trust is being taken private by PIMCO. Do you have any idea this was going to be happening? Has Columbia Property Trust been looking for a deal like this?
Matt DiLallo: Yes. This all started back, I think it was March. They got approached by one of their investors and wanted to take them private. They sent a non-binding offer, hey, we'll buy you at 19.50 a share. That jumpstarted this process where Columbia and its board went out and they solicited bids for the company. They had over 90 companies that they reached out to. They wanted to do mergers or joint ventures or how they want to maximize value here, and they ended up getting a bid really right at what the other investor went at, it's 19.30 a share plus a dividend which is 19.51, so a little bit more than that. All cash deals locks in a good return for their investors. It's a 20 percent premium to what it was trading back in March. That's pretty significant for how office properties, they haven't picked up as much as others, but there's still a lot of interest out there in office properties. Columbia itself, it owns office properties in gateway cities, so New York, San Francisco, Washington, Boston, these big markets that we really haven't seen the return to the office yet. So this is really a bet by PIMCO that we are going to see a return to the office eventually. Companies are going to use offices in the future, maybe not exactly the same way as they have in the past, but they're still going to be valuable. Maybe they'd be hybrid workforces or something like that, but they really believe that there's much money behind it, that offices are very valuable in the future or they're going to play an important role.
Deidre Woollard: I think it's a positive sign that that many different potential suitors were interested in Columbia Property Trust when you consider that its office properties, it's in cities like New York and San Francisco that have suffered during the pandemic, Delta variant factors where return to office keeps getting pushed back now into next year for a lot of companies. Some of the other deals we've seen are in sectors that are really hot. Office properties in the major gateway cities, not exactly the hottest commodity right now.
Matt DiLallo: It's interesting though is who really likes these properties. You see a lot of the REITS that own them. A lot of people that own REITS are retail investors like myself. But who really wants these properties are these institutional ventures like pension funds. They really see it as a good place to get yield in a low yield environment. A lot of offices have 10-plus year leases, so there's a lot of certainty of that cash flow, so they look at it like a bond. PIMCO is a prime example of that. That was their history, it was bonds, and so it's these investors looking for that yield, looking for that cashflow, and offices can offer that. It's not going to offer the upside of industrial properties, but institutional investors, a lot of times, they need that cashflow to pay pensions for teachers or other retirees. This is a way of doing that that's not bond-related.
Deidre Woollard: If you're a shareholder in this company, is this subject to a vote or is this already a done deal?
Matt DiLallo: I'm pretty sure it's subject to a vote. I wouldn't be surprised if this is a done deal even though there were so many others that were interested in it. They had a robust process. We really won't know until a couple of weeks, and the reason I'm coaching this answer is because we're going to get to a deal that I thought was a done deal that turned out not to be a done deal.
Deidre Woollard: Exactly.
Matt DiLallo: It's a long process, so you really don't know. It seems pretty certain though. They had a robust process, and this is an all-cash one. The one that we're going to talk about that fell apart was a stock one. It seems like these type of investors wanted to just cash out and put their money elsewhere, so I'm thinking it's a done deal, but we never know.
Deidre Woollard: If you're an investor in this company, how should you feel about it? Should you take your money and put it into another REIT that you like? What's the experience on the investor's side?
Matt DiLallo: I think if you're a Columbia Property investor, you've lucked out in a sense, because they've really outperformed other office REITs definitely since this deal came out. Personally, I think offices are an attractive investment because nobody wants to buy them. If that was me, I would be looking at, for example, Boston Properties, almost a similar portfolio as far as geographies, gateway cities, and they have a lot of partnerships with some really deep-pocketed investors and they're going out buying properties. They just bought some in Seattle which is a new market for them, so that would be a good place to put your money to work.
Deidre Woollard: Yeah, I agree. They're also looking to expand their life science portfolio, which I like. The other two that immediately came to mind for me are SL Green, I think that's been doing pretty well and betting on that New York rebound. Also, Alexandria Real Estate, which I know is getting a little bit pricey, but in terms of what it's doing as far as life sciences, it's a pretty exciting company.
Matt DiLallo: I also like Cousins Properties which is Sunbelt-focused. Austin's a big market for them, Atlanta, and that's where the offices are growing, and so many companies are relocating and expanding there, so they're leaving a lot of gateway cities. But the other thing is, there's an upgrade factor where if you own class A offices, companies will tend to move up to that spaces, so these type of offices will be in demand. They might struggle a little bit and not see the rental growth rate, but they're going to be in demand and it's going to come at the expense of the class B or class C office space.
Deidre Woollard: We've got a question on the ticker. It's CXP, right? Columbia Property Trust.
Matt DiLallo: Yeah.
Deidre Woollard: Great. That will probably close out, I believe it's end of the year, right? Probably know by the end of the year if that long.
Matt DiLallo: Yeah. I think so.
Deidre Woollard: Are you ready to talk about the one that we actually were supposed to start with today?
Matt DiLallo: Yeah. This is a fun one for me because I 'm actually a shareholder in this one.
Deidre Woollard: I've been working with you on this because I watched each aspect of it I think you wrote a different article on, because this has been a soap opera. You've got these two titans, you've got Sam Zell and Barry Sternlicht of Starwood, and they're fighting over Monmouth Real Estate. That's ticker MNR, is that correct?
Matt DiLallo: Yes.
Deidre Woollard: Okay, good. Why were these two giants in real estate fighting over this company?
Matt DiLallo: Because this is an interesting deal from the start. Because Equity Commonwealth, which is Sam Zell's controlled company, is an office REIT. They have now four properties. When Sam Zell and his team took it over, it was one of the biggest office REITs at a time. They suddenly sold it off positioning in to take advantage of the opportunity. They never saw an opportunity they liked in the office space, and so they decided to pivot to industrial real estate. They saw Monmouth as a great target and all its high-quality industrial properties or warehouses, logistics type stuff. The biggest tenant is actually FedEx at more than 50 percent of the rent. So it's really a FedEx- based company. They really help FedEx with their logistics real estate. So they saw it as a great cashflowing business that they could use the platform to expand into industrial real estate. But a lot of other people wanted it, including Starwood Capital. They were one of the last bidders. It was really down to those two. Equity Commonwealth offered all stock even though they could have paid cash because Sam Zell's company has like three billion dollars in cash, but they went with stock because they wanted to use this as a platform to expand and they wanted that cash to go to do other deals. Starwood offered all cash, and in this case, after a lot of back and forth, it looks like shareholders wanted that certainty of cash versus the upside of the equity they would have gotten. I was surprised. I thought that this was going to go Sam Zell's way. I'm disappointed. But kudos to Starwood, they won.
Deidre Woollard: Why was it being offered in the first place? Was it just looking to transition? What was happening there?
Matt DiLallo: Their institutional investors wanted to acquire them, they wanted to take it private, and so they offered deal, and that sparked, similar to Columbia where it sparked one of these let's go and see what we're worth type of things. They went out and they did a complete process in Zell's company and Starwood over the last man standing in this case after a bit of a bidding war. It's still not a done deal. They haven't agreed to a deal with Starwood and the initial private equity companies, I'm not sure exactly what they were, the investors that kicked this off said, hey, we're still interested if this falls through. So it looks like somebody is going to buy them, but this was what was driving it; they wanted to take it private.
Deidre Woollard: So it's not a done deal for Starwood. Does that open it up for everybody else? Are we going to see another round of potential deals before this actually ends up going private? Is there any deadline for the company to find the right suitor?
Matt DiLallo: I don't think there's a deadline anymore because Equity bowed out. They terminated their agreement and they're going to get a termination fee. The negotiating Starwood offered a higher-value, but they netted out the termination fee. Now, they're free to do whatever they want. I don't think Zell is going to get back in it if this falls through, but industrial real estate is so hot right now, it wouldn't surprise me if then somebody else comes at the last minute and says, hey, we've got cash, let's go take a run at this one.
Deidre Woollard: It's interesting too because you've really got a situation where we can't build investor real estate fast enough in the areas that we need to have it. So that's one of the things that keeps driving the prices up. Industrial, traditionally not the highest priced sector of real estate by any stretch, relatively small price per square foot. But that keeps going up. The valuations keep going up. Is it a little bit bubbly? Is there any concern about that, or is it just that we need so much of it that it's probably not a concern even as prices spike?
Matt DiLallo: I'm not concerned at all. I think it's got so much room to run. One of the things that really as I dug into the sector, Prologis, which is the behemoth in this sector, they had a white paper that they put out which went through all the reasons why the capacity, it's going to be constrained to building. There just isn't the right real estate available, number 1, that's suitable for this, because obviously, real estate; location, location, location. They need specific types of locations to meet these properties. Especially your last-mile distribution centers, they need to be in the right spot inside metro areas. There's the running out of prime real estate to do this, and there really isn't places that you can confirm. There has been talks that maybe we can turn some of these shopping centers into industrial real estate, and Prologis said even if you did that, that's only three percent of what they use in a year. Then there's this not in my backyard, you have permitting issues, so they're really running up into a brick wall where they can put this. So that's one issue. What your Amazons and your FedExes want in a property is really high-quality properties, and so it costs more to build them, and costs are going up, we've seen a lot of inflation, labor costs. So it's getting really tough, and that was one of the reasons Sam Zell wanted to buy a platform as opposed to build out his own, because you need that platform to kick off. I'm bullish on this sector just because it's going to be really hard to build out all the capacity of hundreds of millions of square feet. I think it was like 330 million square feet by 2025, and to put that in perspective, Prologis I think probably owns that alone in the United States. I know there are like a billion worldwide, but you need to replicate a huge, huge company like that to meet that and it's just going to be really hard to do.
Deidre Woollard: Let's talk about what this means for Sam Zell and Equity Commonwealth, EQC because they're trying to pivot. He's got three billion dollars in cash. Obviously, this deal would have been a nice, perfect little pivot. You turn a stock that's not doing so great lately and people aren't really excited about into something that suddenly a lot of people are excited about and see as forward-looking versus backward-looking. If you're Sam Zell, what do you do now?
Matt DiLallo: It's interesting. I scanned through their conference call the second quarter to see if there is any tidbits, and this is when the deal was still going on, but their CEO said that they're already looking at other M&A transactions, they're looking at portfolios, and they're also looking at ground-up development. They were even looking at taking Monmouth in a different direction. What Monmouth does is they own single-tenant net lease industrial real estate, so FedEx is the only tenant. They were looking at we can do multi-tenant things. Also, Monmouth only buys existing properties, so they have relationships with the developers and the developer will finish it, lease it out, and then they'll buy it. They were looking to the higher risk development because that's where the returns are. I would be surprised if they don't continue in that direction and maybe go for another target, maybe buy it from a private equity fund that has a portfolio they want to cash in, because a lot of times, private equity funds, that's like 5-7 years and then they have to cash out. This is a great time to cash out so that's an opportunity. There's some other smaller publicly-traded REITs they could look at. I'm pretty sure they're going to go that direction. They seem pretty bullish on this sector.
Deidre Woollard: That makes sense. Definitely, it seems like they're probably going to look for things, but the question is though, in terms of building, that will cost more money and more time. Is that something that the shareholders and investors should be concerned about if they're trying to building directly versus just trying to acquire? If you were a stockholder of that company, how concerned would you be about where they are positioning themselves?
Matt DiLallo: As a shareholder, I can actually really speak to that one. I see them as like a SPAC right now on industrial because when you look at the direction that they're going, maybe they decide, let's just fold up and we'll return all the cash to the shareholders, but Zell is such a smart person. He knows what he wants to do. So the development side, as a shareholder, I would be a little leery about because they have so much cash. You can't put three billion dollars to work realistically in a short amount of time to give investors a reason to hold on. I really think they need to buy a portfolio and get that platform set up and to prove to investors that they have cashflow coming in, because investors want those dividends, Equity hasn't paid one in years other than doing some special dividends. That would really draw more investors to the company and build up that equity value. I think that's one of the reasons why the deal fell through. Their share price went down after announcing the deal. I just don't think they gave investors enough reason to own it and to buy it and to be behind the vision. If they can get that vision out there a little bit more with some visible deals that they have in the pipeline, that might help.
Deidre Woollard: On the Monmouth side, what happens with how the stock reacts? Because right now, it looks like it went down a little bit immediately after the shareholders voted against the deal. Now, it seems to be trending back up a little bit. What do you think the long-term idea is for investors knowing that there isn't necessarily that much of a long term, but what do you think is going to happen in the next few months as this soap opera keeps going?
Matt DiLallo: I would assume that sooner rather than later, they'll strike some deal with Starwood. I don't really think they want to go through that whole process again. It seemed like the vote was not only a vote against the Equity deal in the upside of what Sam's company was offering but they wanted that certainty of cash right now. I would assume that they're going to accept that deal and that will go through, but it's been such an interesting ride who knows who's going to come in at the last minute and give me more to write about.
Deidre Woollard: [laughs] If you were an investor, would you buy it right now thinking that maybe it's going to have a brief spike, or would you not buy it right now because you're traditionally a buy and hold investor and this really has an end date ahead of it?
Matt DiLallo: If you bought now, you're really speculating that somebody else is going to come in above Starwood and that there's going to be an all-cash bidding war with Starwood. It's possible and that's probably why the stocks reacted the way it was. But I'm more of a certainty type of guy and so I wouldn't want to buy now. I would look for value elsewhere.
Deidre Woollard: You said you're a shareholder. If this deal goes through, you get your money back. We talked about what you would do with the other one, with Cousins Properties. What would you do with that money for this one if you were looking to put it somewhere else in the industrial space?
Matt DiLallo: If I was a Monmouth shareholder, like we've talked about, there's so much froth in the market. Most of the REITs, Prologis and those types, are trading at 20-30 times FFO, which is a metric that we use to measure REITs. For example, office properties trade at less than 10 times, so you're paying up for that. But there's one that I like as far as like a cheaper one; it's Stag Industrial. They're not only the warehouses. They also own traditional industrial properties like a manufacturing place or a flex property which might have some office space and some other type of warehouses. They're under 20 times I think the last time I looked. That's a cheaper way to play. They pay a monthly dividend. It's higher-yielding than you'd get. That's where I would put my money to work.
Deidre Woollard: Let's talk about some of the other industrial real estate deals that we're seeing. We talked before about billion dollar deals. Recently, Abu Dhabi-based Mubadala Investment, they just announced, it was last week, that they're partnering with Crow Holdings to develop a billion dollars of class A industrial across the country. Now, we talked before about some of the issues that are facing construction in general. First of all, there's always labor issues. We had them before the pandemic for years. We're going to continue to have them. The other thing that I'm seeing too is the price of steel. We spent so much time in the first half of this year talking about lumber and freaking out about lumber. Meanwhile, steel has been steadily ticking up and I know that's becoming more of a concern as well.
Matt DiLallo: Yeah. It's just going to be so much more expensive to build these properties, but that really benefits the people that already own it. I know Prologis is really excited about this because they've seen just the value of older properties go up because you're talking about replacement costs and this was probably as of the first quarter. I'm going from memory, but I think replacement costs were up 25 percent year over year, and a lot of that was steel real estate value. So rental rates have to go up to justify this and that's just going to benefit any properties that they own that maybe there's a year or two left in the contract. Their rates are going up significantly when those contracts expire.
Deidre Woollard: Let's talk about another one, AIG Global Real Estate and LB Asset Management. They're also another billion, but they're investing in an existing portfolio which is 8.6 million square feet of industrial. This is on behalf of Korean institutional investors. That makes me think, we've got an Abu Dhabi deal, we've got a Korean deal here. In the past, we saw a lot of foreign investment in office space. I wouldn't say that we saw as much foreign investment in industrial partly because it was industrial. It was not exactly the sexiest sector out there. It seems to me like maybe we are seeing a lot more of international investment in industrial just because we've got a sector that is growing, prices are ticking up, and demand just seems limitless.
Matt DiLallo: Yeah. Money always chases money. They think they can make more money on this because the pandemic was really a tailwind for this, because not only did it accelerate e-commerce but so many companies got caught flat-footed with inventory issues and we had all these supply chain disruption. So instead of the old practice of just-in-time inventory where we just have enough for what we need, we've realized we really need some of that in stock. So there's just those two big demand drivers of needing industrial properties, and outside investors see this. They see it as an opportunity to not only get the yield but the growth that you don't typically see in real estate. That's a really big draw.
Deidre Woollard: I think it's also a sign of increasing sophistication in foreign real estate investment in general. In the beginning when foreign investors are discovering something, maybe they'll tend to go for like trophy properties in gateway cities, the things that have that cache. Now, it seems like there's a deeper level of understanding of markets, certainly of secondary markets in general. One of the things I think that's interesting about chasing that evolution of foreign real estate investing is that it's gone from Miami, New York, San Francisco, and now going into those secondary cities, seeing more foreign investment in Nashville and Charlotte and some of the cities that are also experiencing so much growth right now.
Matt DiLallo: Yeah. You have to look at these two markets completely different. Office, traditionally class A gateway cities, that's what you wanted to own, but industrial is just such a different market because it's really about where people are, and people are out in the suburbs. People are in these other second-tier cities where that's where the growth are. It's cheaper and that's where people want to be, so that's really been a huge growth. Class B real estate is also doing very well versus class A. Somebody is renting class B industrial property, they don't really care to move up to class A. They don't need the fancy showrooms and all the bells and whistles. They just need a place to store their stuff. Both sets are doing very well and you can get great returns either way.
Deidre Woollard: Let's also talk about Canada, because we've got two interesting Canadian-related deals. First one is with Blackstone's REIT. They agreed to acquire WPT Industrial Real Estate Investment Trust. It's a $3.1 billion deal and that's a Canadian REIT, but it also has a logistics portfolio. Tell us about that one.
Matt DiLallo: One of the things I really like to do as an investor is to watch what the big names are doing. Blackstone is another just huge name in real estate, so I really like to see what they're doing. They have a non-traded REIT, so you can't buy it on public markets. You have to buy it through a financial advisor. But it's huge, $50 billion in assets. They've really been focusing on industrial real estate and multi-family properties in the Sunbelt region, so two of my favorite trends. I really like watching them, and $3.1 billion supply, this Canadian REIT, but its entire portfolio is US logistics properties and they've paid a really big price. It was 19.5 percent share price premium, but then the net asset value of that portfolio, 32.1 percent premium to what the portfolio is worth. That just shows how much growth they see is embedded in just the value of that real estate. They think it's going to go up as contracts expire and then they re-lease it at higher prices. To pay that much of a premium, they just see a lot of upside. So I just thought it was a really interesting deal. They are very sophisticated investors, and for them to pay up that much, that just shows you how much upside they still see.
Deidre Woollard: Yeah, that one really fascinates me. I certainly agree with following Blackstone as a great way to understand real estate. They're doing so many things; datacenters, single-family rentals. All of the trends that we're interested in, Blackstone is always the one to watch. But that NAV, that premium, that is really high. That is a really strong bet that they think that they're going to get their money back I would assume relatively quickly, but that seems to indicate that there is a lot more room for prices in industrial to grow.
Matt DiLallo: I think that's really what this is saying and it goes back to what we're talking about earlier. You can't really develop as much of this real estate as we think we need, and so that just makes what's already existing so much more valuable. So even though on paper, it was worth one amount, as they're looking forward, they see it worth so much more as really the contracts change hands and they get a higher rental rate and the cashflow on these properties goes up. That's what this particular REIT that they formed is all about. It's a cashflow REIT. It's not like they're focused on growth but they really are thematic investors, and so they see industrial real estate as being this great theme to generate steadily rising income and that's what they're getting for it. They see this as an opportunity to fulfill that mission of steadily rising income for their shareholders.
Deidre Woollard: The other thing I wanted to clarify too is the difference between industrial versus logistics. Because logistics to me seems like it is a sub-sector of industrial. As you mentioned earlier with Stag, there's manufacturing and things like that, and manufacturing is growing too. Certainly, we're seeing more on-shoring, we're seeing the need for that as our ports are so jammed up. But logistics in particular as a subset is just going through the roof because of the e-commerce trend.
Matt DiLallo: A lot of times, when we talk industrial, we really mean logistics properties because that's where a lot of the growth is. Now, as you mentioned, there's a lot of other good spots in industrial estate, but we just need so much warehouse space, a lot of what the other properties will benefit. For example, Stag, let's say they own a manufacturing facility. It's going to have like a 25-year lease, so it's a cashflow property. But these industrial warehouse focused, they'll maybe have a 5-10 year lease, and as that lease rolls over, that's much more cashflow in the bank. That's what they see, is they can really re-lease these at much, much higher rates.
Deidre Woollard: One of the things that I've been covering recently is this idea of the big fish versus the little fish in industrial, because you've got your Amazons and your Walmarts and your Targets taking up so much space, and then there's not enough room for the little fish. You mentioned earlier the single tenant warehouses. One of the things I find interesting is that like Amazon and others, they are doing a mix of buying their own fulfillment facilities, but they're also leasing an awful lot all over the place.
Matt DiLallo: Yeah. Amazon is just a beast out there for [laughs] every type of real estate. But yeah, if you look at a lot of these REITs, their top tenant is going to be Amazon, and it's the top by a lot. Like it'll be 15 percent, the next biggest one might be five percent. They're just such a behemoth in this sector. They're one of the big drivers a lot of this growth.
Deidre Woollard: That's true. Let's talk about one more Canadian one, KKR selling around a third of its logistics portfolio to Oxford Property Group for 2.2 billion, and Oxford is part of the Canadian pension fund, the Ontario municipal employment retirement system. Although we've seen that in the US too, pension funds are doing a lot of investing in real estate, and it seems now, in industrial real estate in particular.
Matt DiLallo: Yeah. It's all about the same things. They just see this as a great opportunity to, in this case, grow the income that they're producing that will help pay these teachers, or in this case, municipal workers. The teachers' unions they have in Canada, they're very big investors as well. I thought this was an interesting deal because KKR is a new kid on the block in real estate. They don't have like the name brand that Blackstone does, but they did 50 deals to build this portfolio, a lot of small deals. Then that made it a much more valuable portfolio, by building a large-scale portfolio, so they're basically are flipping it now. I think they've only been in this business like four years, and so they're flipping a portion of their business. It was a really savvy deal, they're capturing this demand from these sophisticated investors, and a smart one for them.
Deidre Woollard: What do they do next with that money then? Do you think they're going to be in the business of acquiring more industrial or are they using that money to do something else?
Matt DiLallo: I don't know specifically. A lot of times, these funds, they have to return money to their shareholders. I know KKR is really building out their real estate brand. They're actually just started a net lease business. To net lease is where the tenant pays basically everything. It's very steady cashflow, and again, it's attracting people that are looking for yield. I think they're going to build out like a three billion dollar portfolio. They grabbed a couple of people from WP Carey which is one of the leaders in this space and they want to build out this net lease portfolio, and they got a lot of money to do that with. They're still buying logistics properties. In the same time they're selling this, they bought a couple of more stuff recently. So they're really getting into real estate over there.
Deidre Woollard: Interesting. So then they can use this money to buy some more real estate, and then they could perhaps flip that again and just keep stacking up the cash. That's a great strategy right there.
Matt DiLallo: That's where a lot of these more sophisticated investors, what they'll do. They are buy and hold but they're not a buy and hold forever. They'll buy it four, five, 10 years maybe, but there's always a sale in mind because that, one, gives their investors the return. They can return capital to investors that want to cash out. But it also just showcases their ability to create value. Once they sell, that's when they can say to their investors, hey, we did this IRR that was really great. It's almost like a sales piece to show how good they are.
Deidre Woollard: Yeah. Definitely. Let's talk about more things with Sam Zell. One of his other REITs, Equity Residential, is going into a joint venture with Toll Brothers. Toll Brothers is of course the luxury homebuilders, the top tier of the homebuilders in terms of price per home. They're going to invest 750 million in a joint venture over the next three years, and Equity Residential, ticker EQR, is contributing three-quarters of it. They're building these communities in some of the cities that are the hot ones that we've talked about; Austin, Texas, Atlanta, Dallas, Denver, San Diego. It's an interesting deal because Toll Brothers I think is just starting to figure out, and I'm saying this across some of the other homebuilders too, they're starting to figure out multi-family and they're starting to figure out build-to-rent at the same time too.
Matt DiLallo: Yeah. It's always interesting to watch what people that really know what they're doing in this business when they do these type of deals. We as real estate investors can get ideas of what the trends are. One of the really interesting trends, and we're going to talk about this a little bit later, but you see homebuilders are really partnering with investors in these build-to-rent programs. Now in this case, they're building apartment buildings for an apartment building owner and it just gives them this clarity of sales. What they would do, they would build this apartment building, then to try to rent it up, and then sell it to an investor. But this just makes it easier. They know who's going to buy it if the deal's already done, and in the same side, it gives Equity Residential this visible growth. They can use their balance sheet to help fund these apartments. It's not going to really impact their metrics because it's in a joint venture and they get this visible growth with a company that really knows how to build apartments. It's a really great strategic partnership, and there's several of these that are coming up where you see smart people on both sides partnering together, taking advantage of a trend. In this case, the trend is we need affordable housing, but this is affordable housing to higher earning people, but they still need apartments that suit their needs in these fast-growing markets. It's an interesting combination there.
Deidre Woollard: I've also been watching it too because we talked the homebuilder earnings last quarter; huge. Last couple of quarters have just been phenomenal. The homebuilders can't build houses fast enough. But also, you've got very savvy, long-term thinkers at all of those companies. They know that they're dealing with a trend that will, and we've already seen new home sales, tick down a little bit. I think it's interesting that they're finding these other ways to build and to make money. Haven't really seen that from some of the homebuilders before, but I think they are probably more forward thinking than I've seen them be before.
Matt DiLallo: Yeah, because homebuilding is a very cyclical industry and they know that there's a bust coming and it just always happens. They don't know when it's going to happen. So if you can have deals in the pipeline that just can give you some cushion, and this also cushions against inflation because the pricing is in there for both sides. They know what they're going to pay and it just really helps to create a more stable earnings profile for these homebuilders for at least a portion of their earnings. That could give investors more confidence and they can get a higher multiple in the future. A lot of times, investors are scared of homebuilders because of the lumpiness, but if there is some consistency, that'll really help.
Deidre Woollard: Exactly. I think that's exactly where they're going. Let's talk about another sector that I find really surprising that it's coming back so fast. We just had a story on the Millionacres site, I think it was today or yesterday, about student housing. There's actually a scramble for student housing right now. It's really interesting because it's obviously was affected a lot by the pandemic. We're still having different schools thinking about their policy with the Delta variant, and masking, and all of that. But student housing is back really strong. You and I have both talked about American Campus Communities before, they just had a strong quarter, and then there are now these other deals that are coming along where a couple of companies are doing some big things with student housing. One of them, I know one of your faves, Brookfield, which I feel Brookfield's a little like Blackstone for me. It's like see what they're doing and follow along.
Matt DiLallo: Yeah. They're so smart. They're very forward thinking. Student housing is one that I really thought was going to do poorly in the pandemic, and it held up much better than I thought. I think part of it is because students actually didn't go home. A lot of times, they stayed on campus. They just wanted to be near their friends or whatever, and that surprised me. I thought they would empty out and this is going to be a really hard hit, but it hasn't, and now, you see all these real smart investors that are putting big dollars in Brookfield, Blackstone. It's because there's a lot of growth coming. There's a lot of younger millennials that are graduating high school next couple of years, my niece graduates this year, and they're going to be looking for places to stay. A lot of these big schools just don't have the room on campus, and so they need these student housing providers to help them. I think it was American Campus when you said that there's like a 20 percent decline in just the supply in some of their markets, and that's going to just make rental rates go up, and so they're really well-positioned for that. You see Brookfield trying to get into it and Blackstone because they see a lot of growth ahead.
Deidre Woollard: Brookfield is doing this deal with Scion Group. Together, they're going to acquire about another billion dollars in student housing. Scion is interesting because they have an existing portfolio of 58,000 beds. In student housing, you always talk about the beds versus the units or anything like that. They've got 58,700 beds in 29 states. The other thing that's interesting is Brookfield is already in this business but not in the US because they acquired Student Roost in 2016 and that one's based in the UK. So they've got properties now throughout Europe, 159 student housing properties, but they haven't done that in the US before.
Matt Dilallo: Yeah. It's a logical extension of this business. The US student housing market is very robust and it's mostly private equity-owned because American Campus Communities is the only public company that owns these. You see all these smart investors that own these properties, these institutions, because it's a really steady business, and they like that steadiness when you're dealing with real estate on the institutional side of it. Those type of investors, a lot of times, they need that cashflow as I mentioned, they're trying to pay pension, and so it's a really good business for that.
Deidre Woollard: Yeah. Just to underline that point about American Campus Communities, they're really the only pure-play student housing publicly traded REIT. That's pretty much it, which I think is interesting. It's one of the reasons that it's been a Mogul recommendation. It's certainly something that we've looked out for a long time.
Matt Dilallo: Yeah. They're really good at what they do too. You have those two things. Again, you're not only getting the income here but you're getting the growth because they can grow rental rates faster than you can do in a lot of other things. A lot of these that we've been talking about, industrial real estate, student housing, single-family homes, there's just that growth. Rents are growing really, really fast, and so you've got a stable business that performs surprisingly well during the pandemic, great tailwinds, and a lot of growth, and that's what makes for a really great real estate investment.
Deidre Woollard: The Blackstone deal that you mentioned is Blackstone's non-traded REIT which is BREIT. We talked about that earlier. They've got a $784 million deal with Landmark Properties. They're going to acquire and recapitalize eight student housing properties. So smaller because it's only about 5,400 beds, but if I know Blackstone, this is probably just the start of where they're going with this.
Matt Dilallo: Yeah. They helped another company. I can't remember off the top of my head, but it was a educational properties trust. They help take that private a couple of years ago and they handpicked 20 student housing properties out of that portfolio and they put it in BREIT just to add to that. This Landmark deal, they talked about it in the press release, is that this is a start of a relationship where they expect to expand that partnership. Again, it's another one of these examples of really sophisticated investors. They see a lot of opportunities here. For us on the other side, we can see them doing this and just is a signal to me, hey, look closer at American Campus Communities because that's your opportunity here, that if you want to get into that space, you got a lot of smart people in this space and that's an opportunity.
Deidre Woollard: Yeah, absolutely. One more on the student housing space, TPG Real Estate Partners, they purchased the student housing portfolio from Preferred Apartment Communities, which is ticker APTS. That was eight properties and over 6,000 beds. That was for 478 million last year. So a lot of money trading hands in this sector, certainly a lot of potential for growth. But let's talk about the last portion here; single-family rental home boom. You and I have talked about it before. The Trailblazers team talks about it all the time. It's the amount of money going into this space right now, and the variety of players is really interesting to me. Because you consider when this institutional idea of institutional single-family rentals, Invitation Homes started this in the middle of the great financial crisis with Blackstone, of course. Now, they're the behemoth in the space with about 80,000 homes, and they're only getting bigger, but the competition that they're facing both public and private also is getting bigger.
Matt Dilallo: Yeah. That's why they're such an interesting company, because of their size, and because they're so big, they can attract strategic investors. Two of the things they've done this year is they formed a $375 million joint venture to acquire single-family homes, and so that gives them the capital to expand without really expanding their balance sheet too much. Then they did another innovative strategic relationship, this time with PulteGroup, which is a homebuilder, and they're going to buy 7,500 homes that Pulte's specifically building for them for rent over the next five years. Here, we see these two similar trends that we talked about with the Equity Residential, where we have a homebuilder partnering with a really sophisticated investor, and it gives the homebuilder this steady income. They know they're going to sell 7,500 homes over the next five years. They can plan for that. Instead of going and putting all that money to risks where they buy land and then they get it ready and then we have a housing market collapse, they know they're going to sell these homes, so it's great for them. Then for Invitation, they don't have to go and compete against all these other companies that are getting into the space. They have all these homes ready to buy. I think they're going to buy 1,000 of them sometime early next year, it's been closed. It's in great markets, Sunbelt market. It's a great deal, really smart deal for them. They're one of my favorite holdings. Their rental rates are going through the roof. I believe it's like 11 percent rental growth rate which is phenomenal growth, so a really exciting company.
Deidre Woollard: I think this whole thing is interesting too because you would figure if they're selling off built around a whole community, that it would be like a discount or something like that. But these are actually selling at a premium, which I find interesting. You and I both are interested in real estate crowdfunding. They bought a community last year from D.R. Horton. They've amassed more capital to get deeper into that space as well. So you see, you've got the homebuilders, you've got Invitation Homes, you've got real estate crowdfunding, you've got private capital. So many different streams are coming into this space that I just find it's just fascinating to see how fast this has all come together. It's really interesting I think for investors to see when the market as a whole catches an idea, feels like it's got a long-term thing, a similar thing that we're seeing with industrial logistics. The ways that capital amasses and transfers really rapidly, it's like watching a neural network. You see these things going ping, ping, ping all over the place.
Matt Dilallo: Yeah. That's why I love watching what other people are doing, because you can really see the underlying trend, like, oh, this is really big, this is going to be really big. That is what we're seeing in single-family homes. A lot of it comes down to just how people are changing. It used to be you buy a house and you'd be in there 30 years, and that's just not the case anymore. I know my wife and I have bought and sold three homes in 10 years of marriage just because we just wanted that flexibility. Now, we live in two places and you're seeing people like that with that flexibility where they're opting to rent, sort of what we're doing where we bought two places, but a lot of times, they're renting, or they're Airbnbing, just that flexibility that you see now with remote work. Let's say they want to live in Austin for a couple of years, and then they want to live in maybe Seattle. That's what these single-family rental companies offer, is that flexibility. That's why this trend is really picking up. Then you just have so much money flowing into it because you have these sophisticated investors that are looking for yield, they're looking for growth, and this satisfies both of those.
Deidre Woollard: The other factor too is that home prices have gotten so ridiculously high that in many markets, it is cheaper, it makes more sense to rent even with the interest rates being low, and every indication that we're seeing is that interest rates being low isn't something that's going to last forever. When they do go up, we're going to see a lot of sticker shock. Keying in onto that idea of remote work, one of the things that I've been watching on the startup side is you've got people moving around. They want that mobility, but they also want equity. So I've seen just the start of very small companies that are buying homes and renting them out where people get an equity share or they contribute equity like an iteration of a rent-to-own model. Not any really investable ideas there yet, but something that I think is interesting because we're seeing something happen where people want that mobility, they like the single-family rental, but then they also have that worry about are they also throwing their money away.
Matt Dilallo: Yeah. We haven't really talked about this deal, but Blackstone, they're buying this Home Partners of America for six billion dollars. They own 17,000 homes. Their business model is to really work with people that want to rent a home, and they'll go out and they'll buy a home that meets their criteria but it's a place that the homebuyer would consider buying in the future and they'll have the option to buy. It's a different spin on this. It's definitely a model that's out there for people that maybe don't have that downpayment right now or you're not sure if this is the right location, being in a place that you could see yourself in that rent-to-own model. I can see more of that happening too.
Deidre Woollard: Yeah. One of the reasons I love talking about real estate and real estate technology is because I think, and the Trailblazers team are working on this, we're just seeing so many new ideas that are taking traditional real estate and packaging it in new ways, speeding up the transaction, changing downpayments, basically changing everything. So the single-family rental boom is definitely part of that. Just wanted to mention one more deal that we had on our list here which was Lennar and their four billion dollar single-family rental platform that they are working on. Lennar, they're the giants in homebuilding. They're definitely focused on townhomes, standalone homes in the high-growth markets. That could be an interesting competitor to Invitation Homes. There's always so many other small players that are starting to emerge in the single-family rental space as well.
Matt Dilallo: Yeah. It's interesting to see these home builders getting into that. Invitation Homes, their business model was to go find an existing home that they could rent out, and you had to get a newer existing home. because homes, they deteriorate pretty fast and so that maintenance. I just bought two new homes in my life and they're great because you don't have that maintenance. I own an older townhome, [laughs] it's got a lot of maintenance. That's been a deterrent to some of these. But when you're buying directly from the builder and you can buy a home that's built specifically for renters in mind, it marries these two ideas very well. I think Lennar getting into the business is a really big thing for them because it provides that stability. They can sell steady stream homes to this platform. It will really make this platform a good one for the investors because visible growth and just the right type of homes for that type of market.
Deidre Woollard: On another factor too, and I think this is one of the reasons that it's easier to manage single-family homes at this point, is the impact of smart home technology. I know Invitation Homes is looking at putting smart home packages in a lot of their homes. Lennar does that in a lot of their new builds. You've got this ability to monitor individual homes in a way that you wouldn't have had. It just didn't exist a decade ago. I think that's part of it too, is that you've really got a way to take the data and make it actionable in a way that you could previously only do in a multi-family when you could see everything in one building. Now, using data, you can remote monitor. There's a lot more that can be done. I feel like we're just at the beginning of smart homes. I think that people tend to focus on the ideas of turning on the lights automatically. But the more fascinating stuff is temperature, plumbing drips, little maintenance issues, and catching them before they get bigger.
Matt DiLallo: I'm 10 hours away from one of my houses. I have a place in Charleston and then one at Pittsburgh. I can remotely watch the house if I'm not there with my ring cameras. I can check in and make sure that everything looks okay. I've had Nest learning thermostats before to check the temperatures. It really helps people, your snowbirds that want to do that type of thing, or your remote workers that maybe they have a vacation home somewhere else. It really enhances that. I don't have to worry about it. There's even things, like I've realized in the couple of months that I've been away from my house is that I really should have installed some remote locking system of the door because I had UPS or somebody like that drop off packages to the wrong address and I had to have somebody go over with the key. There's things like that where this technology makes those type of things easier. I don't have to give somebody a key. I can just give them a code. So I'm really excited just as somebody that's in this of what new technologies out there that will make my life easier.
Deidre Woollard: Then you start looking at companies like Latch or companies like SmartRent that are in that business as well. Those are companies that we've talked about as investments as well. You've really got a lot of investable ideas starting to all come together around this single-family rental boom.
Matt DiLallo: Then you throw in being able to use vacation rentals for these places. It just opens the door to so many people who can really be real estate investors that couldn't before. Being a vacation home owner is something that was a very tough process before. But now, Airbnb makes that easy. So there's just so many new opportunities that we're seeing just through technology.
Deidre Woollard: Absolutely. All right. We've got about three minutes so let's wrap up the impact of all of these deals and what we're going to see going forward. I want to bring up one stat real estate-related I saw on the Wall Street Journal today that said, "In the first eight months of 2021, companies announced mergers and acquisitions worth 1.8 trillion in the US and more than 3.6 trillion globally." So really, it's not just happening in real estate; it's happening everywhere. There's mergers, acquisitions, joint ventures. There's so much capital. We talked at the beginning about this, that capital is impatient. We saw a lot of dry powder amassing at the beginning of the pandemic. But you don't want to behave like that, that idea of like, okay, there's an opportunity, we're going to spend this money. That opportunity that they thought was going to come didn't come, and now, we're seeing some strategic moves. But also, some people seem to maybe be paying a lot for things. It's interesting. Do you have any concerns that some companies are paying too much for things?
Matt DiLallo: Absolutely, because real estate is very cyclical. Eventually, this is going to come home to roost and we will see this. But there's just so much demand out there for single-family rentals, for industrial properties, that were probably years away before that'll come and then probably a lot more froth before then, because we just went through a downcycle. We're just recovering from that downcycle. So I would be surprised if we have another downcycle soon. But interest rates is going to play a key role. How quickly is the Fed going to raise interest rates, and if they raise them really fast because inflation gets hot, that could be what triggers some of this where we have a cool off. But I don't see them doing that because, for example, the Delta variant came out of nowhere, slowed everything down really quickly, did what a federal interest rate reduction would have done. So I think tap the brakes, we could have another one. Hopefully, we don't, but it's just one of those risks that's out there. So I really think that we're in for a couple more years of doom. That's where I'm investing and that's what I'm seeing.
Deidre Woollard: Yeah, I would agree. One last note on that too is you mentioned the Delta variant. I thought it was interesting to see that it hasn't really seemed to scuttle any deals yet. At the beginning of the pandemic, we saw a lot of deals get paused or something like that. So far, it doesn't seem to be doing anything. Really, the feeling of continued optimism.
Matt DiLallo: I think we have decided we are going to live with this virus. Maybe that's not the best solution but that's just what everybody has decided, that we're ready to move on and live with it. Now, we have companies that aren't back in the office yet. I'm really surprised because I saw packed football stadiums over the weekend, that was all on Twitter. So if we're willing to go football games, why aren't we willing to go back to the office yet? That's the one thing that I'm waiting to see and that will show me that we're really back, but I think we're ready to move on. We're ready to live with this.
Deidre Woollard: All right. That brings us to the end of the hour. Matt, thanks so much for your time today.
Matt DiLallo: Thanks for having me.