John Khoury – Asymmetry and Opportunity in Public Real Estate at Long Pond (EP.474) | Capital Allocators – Inside the Institutional Investment Industry Brief

Key Takeaways

Publicly traded real estate securities are currently undervalued, presenting potential investment opportunities for the next two years.
Long Pond Capital, a $3 billion hedge fund, specializes in exploiting asymmetry in public real estate securities.
The real estate investable universe has changed, influenced by passive investing and short-term trading models.
Rising interest rates in 2022 caused significant real estate value declines and new supply challenges.
Long Pond Capital launched LPRE, an actively managed ETF, offering liquid, transparent, and tax-efficient real estate exposure.

John Khoury, founder of Long Pond Capital, manages a $3 billion hedge fund specializing in publicly traded real estate securities.
Long Pond, one of few firms remaining in this niche after 15 years, recently launched an active ETF (LPRE).
Khoury's interest in public real estate began in 1999 at Lazard, observing significant valuation discrepancies between public REITs and private assets.

The public real estate market grew from approximately $300 billion in 2002 to a broader, more diversified universe.
Secular risks have impacted traditional sectors like office and retail, while new subsectors such as data centers and self-storage emerged publicly.
The public market, where 90% of real estate is privately held, is influenced by shifts to passive investing and the rise of short-term 'pod' trading models.
Increased market volatility for REITs creates opportunities for firms like Long Pond Capital to exploit disconnects between stock price and intrinsic value.

Long Pond Capital, founded in 2010, aims to exploit asymmetry in publicly traded real estate securities by controlling its investment process.
The firm's investable universe covers approximately 325 companies, including traditional REITs and non-REIT real estate firms like hotel management and home builders.
They use an 'asymmetry ranker' to model company cash flows, apply discount rates based on business models, and incorporate qualitative overlays on management and capital allocation history.
The process ranks companies by the delta between stock price and fair value, seeking out-of-favor companies with clear value realization paths.

Long Pond Capital's portfolio turnover is episodic, with significant capital movement during market dislocations like 'Liberation Day'.
Portfolio construction deviates from purely quantitative rankings due to risk management and respect for market factors like momentum and value.
The firm typically holds 30 long and 30 short positions, with long positions generally larger, sometimes up to 12% in special situations.
Short positions are catalyst-focused and smaller than long positions, used as hedges, such as shorting lower-quality hotel REITs against longs like Hyatt.

Analyst coverage models have changed, with analysts now specializing in 40-50 securities due to subsector specialization and lack of correlation.
Public market opportunities are found in secularly winning subsectors like apartments, industrial, and self-storage, which appreciated from 2009 to 2021.
Rising interest rates from zero to five percent in 2022 led to significant value declines and a new supply problem from extensive development.
Long Pond avoids long exposure to general office spaces due to high maintenance costs, uncertain AI impact, and persistent risk.

The office sector shows recovery, particularly in prime properties in cities like New York City, with capital flowing back into desirable spaces.
The housing market faces affordability issues, with home builders using mortgage rate buy-downs as existing home inventory remains frozen by low rates.
The housing affordability crisis benefits the apartment sector, as rising rents and stable incomes make relocating less attractive for tenants.
Sunbelt apartment REITs are being invested in at implied cap rates of 6.5% to 7%, significantly higher than private market rates around 5%.

The retail sector has seen a healthier market emerge, driven by the necessity for retailers to have an omni-channel experience.
Hotel management and franchise companies are favored, exemplified by Hilton's increased free cash flow post-separation from Park Hotels.
Manufactured housing, such as Equity Lifestyle Properties, offers stable business with consistent, growing cash flow.
The cold storage sector, despite a significant stock price drop for Lineage, shows strong fundamentals, with the company now trading at a lower valuation.

Long Pond Capital launched LPRE, an actively managed ETF, to provide institutional investors with daily liquidity, transparency, and tax advantages.
The ETF focuses on 80 high-quality real estate companies, actively holding the 20-25 cheapest of these.
Approximately 50% of the ETF's holdings overlap with Long Pond's existing hedge fund long book.
The guest is optimistic about public real estate, which has underperformed the S&P 500 significantly since early 2022, seeing potential for recovery and earnings inflection.