‍

Interview Summary

In this insightful episode of “The Business Brew”, host Bill Brewster sits down with Ryan Dobratz, Portfolio Manager of the Third Avenue Real Estate Value Fund, for an update on the real estate space—including a deep dive look into Fannie Mae and Freddie Mac.  Of special note, Ryan and Bill discuss these entities likely path out of conservatorship, the potential impact on mortgage spreads, and the major developments since their last conversation.  Ryan also covers the state of the real estate markets, highlighting opportunities in industrial and residential sectors despite macroeconomic pressures from interest rates and inflation distortions, particularly the lag in CPI shelter data. The conversation also covers long-term housing trends, including manufactured housing, timber investments, and new investments in homebuilders like Pulte and Champion, with a broader emphasis on structural shifts in U.S. housing dynamics. Altogether the dialogue combines bottom-up research with top-down awareness, touching on inflation distortions, potential legislative catalysts, housing supply chain nuance, and market psychology.

‍

Interview Highlights

• 03:50 Real Estate Markets & Rate Sensitivity 
  • We've had about 75% of our portfolio report earnings in the last two weeks, and the fundamentals are strong in certain pockets of residential and commercial real estate. But there's a big divergence between those and other areas where results have been weaker.
  • Shelter is almost 40% of CPI, and it’s lagging. Public market data, such as the recent results of multifamily REITs, shows rents are flat or down, whereas CPI still shows 3-4%. If that shelter input were reduced to 2%, headline CPI drops significantly—potentially below 2%.
  • Real estate and healthcare are the only two sectors trading below their 5- and 10-year average multiples. In fact, Third Avenue’s real estate holdings are trading at more than a 20% discount to NAV versus a historical 9–10% average discount.
• 09:40 Industrial Real Estate Resilience 
  • Industrial real estate is one of the few sectors with rent and net operating income growth, due to embedded lease spreads. Companies like Prologis are rolling leases at higher market rents while carrying long-term low-cost debt.
  • National vacancy is about 7%, but Class A industrial in top markets is more like 5.5–6%. With supply down 75–80% nationally, and reshoring trends increasing, the outlook remains constructive.
• 10:50 AI, Autonomous Vehicles, and Real Estate  
  • AI and autonomous vehicles will impact real estate—drone delivery changes fulfillment, and autonomous taxis like Waymo in Austin are widely accepted, especially for safety. That could reshape suburban commutes and residential patterns.
• 17:30 Freddie & Fannie Developments 
  • The CBO updated its report in December 2024 and illustrated a full recovery for preferred shareholders under the current 4.5% capital ratio. A move down to 3% would unlock more value for other stakeholders.
  • Despite recent commentary, a merger between Fannie and Freddie is low probability in Third Avenue’s view. Regulatory and competitive hurdles make it particularly challenging.
  • Fannie enhanced its financial disclosures last quarter, suggesting the entity is preparing for a capital markets transaction. Freddie hasn’t, so Fannie may return to market first.
  • The Preferred Equity trades around 65% of face value. Even from today’s levels, IRRs are still 15%+ if they exit conservatorship by 2028. We're managing position sizing accordingly.
  • Resistance to conservatorship exit mainly comes from: (1) housing policy influencers, (2) MBS investors who fear tighter spreads, and (3) financial institutions profiting from mispriced CRTs.
• 36:20 Housing Sector & Builders 
  • We’ve added exposure to residential: initiated positions in PulteGroup and Champion Homes. Pulte is well-diversified across buyer types and leads the active adult space with its Del Webb brand.
  • Champion is part of the tightly held manufactured housing market. It has underutilized capacity and is poised to benefit if chassis requirements are rolled back through pending bipartisan housing reform.
  • Residential markets are 39–40% of our portfolio now, including builders, GSEs, transaction-tied firms like FNF, and self-storage through U-Haul.
• 50:05 Timber & Remodel & Repair Markets 
  • Timber names like Rayonier and Weyerhaeuser trade at steep discounts to private market values. Southern Yellow Pine prices are at century lows on an inflation adjusted basis, but setup looks favorable, especially if lumber demand rebounds or trade opens up with China.
  • Rayonier is a Jacksonville-based play with both timberland and real estate development—essentially a mini-St. Joe. It’s net cash and trading at ~$1,600–1,700/acre, well below recent private market transactions.
• 01:07:05 Commentary & Portfolio Management Strategy 
  • We generally cap individual positions at 7% of the portfolio. So as the GSE Preferreds appreciated, we trimmed to stay within those limits—even though the IRR remains compelling.
  • For “less liquid” Preferreds with lower coupons, one may not get full par, but could collect steady income post-conservatorship. It’s a different angle for those seeking yield.

Learn More:  

To learn more about Third Avenue’s distinctive approach to real estate investing, view our strategies or contact us at clientservice@thirdave.com.