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What's the Alternative? | Episode 8 | To Be or Not to Be Liquid (in Real Estate) Featuring Phil Bak
7 Plays9 months ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode Shana sits down with Phil Bak, CEO of Armada ETFs, REIT-specialty asset manager that delivers customized solutions to REIT investors through ETFs, SMAs, and access to proprietary AI and machine learning REIT valuation models.
Phil has been innovating in the ETF industry for over 15 years. He has previously served as Founder/CEO of Exponential ETFs, an ETF issuer and sub-advisor acquired by Tidal ETF Services in 2020. Phil has also served as Chief Investment Officer at Signal Advisors, a venture-backed startup in Detroit and Managing Director at the New York Stock Exchange where he worked on market structure enhancements, ETF listing rule changes, market maker incentive programs, and helping with asset managers launch ETFs. Prior to that Phil held product development roles where he developed and launched the first ever mixed-asset ETF, the first ever carbon-credit ETF, and patented the use of a controlled foreign corporation inside a ’33 act ETP.
Phil is also a Board Advisor of Civex, a startup platform bringing investor advocacy to retail investors, and Principal of Exponential Indexes. Phil is a graduate of Yeshiva University, is a Chartered Alternative Investment Analyst (CAIA), host of two podcasts (The ETF Experience and the Phil Bak Podcast), and an author who has been published on Yahoo Finance, TheStreet, Think Advisor, Seeking Alpha and regularly on Substack. Phil has been featured in top-tier media outlets such as the Wall Street Journal, Bloomberg, CNBC and Financial Times.
Learn More About Armada ETFs: Armada ETF Advisors
Connect with Armada ETFs on 𝕏: @armadaetfs
Connect with Phil on 𝕏: @philbak1
Connect with Phil on LinkedIn: Phil Bak
Check out The Phil Bak Podcast: The Phil Bak Podcast
Check out Phil's Substack: BakStack
Learn More About Banrion: Banrion Capital Management
Connect with Banrion on 𝕏: @Banrion_Capital
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana on 𝕏: @shanas621
If you are an advisor wanting to check out our platform, we want to hear your feedback!
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
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Transcript
Introduction to the Podcast
00:00:02
Speaker
Welcome to Bonnie and Capital Management's What's the Alternative podcast. Joining host Sheena Orsik-Sicil, the queen of alternatives and founder, CEO of Bonnie and Capital Management as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
Meet Phil Bach
00:00:32
Speaker
Welcome, everyone, to another episode of What's the Alternative? This episode, we are featuring one of my favorite people in the whole world, a very good friend, somebody who drove all the way from Detroit to Chicago just to bring me dinner when I got out of the hospital from my back surgery, the one and only Phil Bach. How are you, Phil? All right. Great to be on. Hey, Shayna. Well, it's great to have you on, as some of our listeners may know, because
00:01:00
Speaker
We have done podcasts, your podcast together in the past and we go way back. And I love to kind of let them know a little bit more about you and how you started. I don't think everybody understands that you have run and exited some ETF firms in the past. You've had a lot of success and how we got to know each other over the years is through that and then working together on where you are now. So why don't you give us a little bit of your background.
Phil's Journey in the ETF Market
00:01:28
Speaker
Yes. So, you know, I started my career in ETFs and I did a few different things. I had trading rules, product development, product management roles, capital markets. I did a few things and ended up spending several years at the New York Stock Exchange working with ETF issuers. And that allowed me to work with regulators and market makers and other ETF issuers and kind of be central to the ecosystem.
00:01:49
Speaker
I had a bit of a personal crisis back in 2016, some health issues, some other issues, and I came out of it with a real Carpe Diem type mentality where there were things that I had wanted to do that were like, oh, I'd love to be an entrepreneur one day, but never really had to get up and go to just stop my whole life and go do it, things on a personal level as well as professional
Founding Exponential ETFs
00:02:10
Speaker
level. And I came out of that episode, out of that period, really just trying to do that.
00:02:15
Speaker
sees the day every day, right? So I started a company back in late 2016 we started, which became known as Exponential ETFs. We had a couple funds that were proprietary ideas. What we're probably best known for was what we ended up pivoting to, which is being a sub advisor of other ETFs. So we're managing
00:02:34
Speaker
the trading the tax management the capital markets of we ended up with about 16 ETFs two of our own strategies 14 other strategies and then we sold the company in 2020 to title Financial Group. So, you know after that I had a
00:02:49
Speaker
you know, long journey of a couple of stopping starts at a couple of big ideas that I tried to raise for. Some didn't go anywhere, a couple went a little, you know, went somewhere. But ultimately, what I found, and this is really back now two years ago, working with a guy that you know, well, Justin Goldberg, was that there are some real opportunities in the public REIT market more than I had ever
00:03:11
Speaker
Considered I mean my whole career, you know, I'm like you I'm a Kaya, right? So I've been very involved in alternatives I'd worked on a lot of alternative strategies with you know, Guggenheim and you know, we're right X and became Guggenheim and different things I just never thought very deeply about REITs. They're born REITs are super boring
00:03:28
Speaker
Who cares about reads. And I always just assume to read as a read they're all fungible they're all basically, you know, some form of real estate beta. And, you know, through Justin and getting involved in the project to launch house which you were Shane a very very helpful instrumental on.
00:03:45
Speaker
I came to see that the correlations between the REIT subsectors were very low.
Opportunities in Public REIT Market
00:03:50
Speaker
The correlations between REIT investment products or real estate investment products, depending on the product structure and more specifically, depending on whether or not there was price discovery in the secondary markets, right, was wildly, wildly different in terms of risk profile and that there was a lot of opportunity. You know, you've got at the time you had office REITs that were just crashing with no bottom in sight. You had a
00:04:13
Speaker
Data, you know, cell towers and data centers that were just going up with no end in sight. And he had a real divergence here. And I think a growing need, which we'll probably talk about, but a growing need to to offer things that are uncorrelated that are differentiated, you know, a need for
00:04:30
Speaker
focus on alternatives broadly, but also, you know, within real estate to do that for investors as people are, you know, like she piling more and more into market cap weighted index funds that are just so heavy and US equity and US equity tech and US equity large cap, everyone's so deeply concentrated. I'm looking around the around the curb and saying, all right, that's great. And that trade is working out great for everyone. And let's hope it continues to work out great for everyone. But
00:04:56
Speaker
What's next? What if it doesn't?
Investment Strategies for Diversification
00:04:58
Speaker
Where is the money going to flow? What do investors need? What can we create that's actually going to solve the basic problems of diversification, of long-term sustainability and staying power? What can we do that has a sense of permanence and durability for people's portfolios? And I came to see that within real estate, there were pockets
00:05:19
Speaker
of areas that were, you know, undervalued, that were being traded, what I thought was, you know, relative to long-term valuations, traded at a discount, but then also had this sense of permanence. Like, you know, there's a real, a REAP, you know, I call it the most, at least a public REAP, I call it the most transparent asset class because,
00:05:34
Speaker
You know what I know, it's that you can go knock on doors and visit the buildings and you can see the office buildings, you can see the warehouses, you can go there and look and you see it's a roof over someone's head and the balance, the financials are extremely transparent. It doesn't mean that they are always solid, never go down, but there's a sense of permanence there. I mean, at the time we had banks or crashing to zero because they didn't hedge your duration risk.
00:05:59
Speaker
Now you're an investor in a community bank. You don't know whether they're hedging their duration risk or not, but you're subject to all these risks that you have no idea about.
The Appeal of Real Estate Investments
00:06:08
Speaker
And I felt like getting involved in real estate, there was a little bit more of a tangible nature to it, something a little more permanent and real that was very attractive to me.
00:06:18
Speaker
Yeah, and it's interesting because I, like you, was always like, eh, whatever. REITs aren't really real estate. They trade in a public markets on exchanges. They have equity beta. But then I got involved in the house project. And when we launched house, I really got to know that there are definitely areas in the REIT world that are not really
00:06:42
Speaker
A lot of people don't have exposure. That was the whole point of how this is that it really wasn't any just pure residential REIT offering out there. Most of the REITs that were out there were like office data, like you said, data centers and things of that nature. You had a lot of healthcare oriented REITs, things that were related to like
00:07:01
Speaker
long-term care, hospitals, things of that nature. But there were pockets where there wasn't anything. And that's why House was so interesting. But what I found most interesting about the real estate market, and I really want you to talk about, because you've written some great pieces on this, and I'll link them in the show notes. But one of the things we talk about a lot with advisors is with the advent of all these interval funds and things that are coming out,
00:07:29
Speaker
The understanding of those liquidity terms are not good. People think, oh, it's a 40 act product or, oh, it's easy and I can access it. So it must be super liquid and I can get all my money out whenever I want. And the truth of the matter is that is not the case. And we had a perfect case study of that in the recent years with BREAP.
00:07:50
Speaker
And you've written about that extensively, and that sort of helped drive you to the next big thing that you started working
B-REIT Liquidity Issues
00:07:56
Speaker
on. So can you touch a little bit about that whole situation that happened with B-REIT and sort of what it exposed about the lack of education and understanding, especially in the advisor market, about these semi-liquid types of investment opportunities?
00:08:13
Speaker
It was such a fascinating episode, and it's still ongoing. So when I say it was, it is, and we'll see how it plays out. There's a lot of different ways it could go, and some I think are not as disastrous for the investors in this vehicle. And some potentially can be. There is a potential, what we're calling a liquidity death spiral here. So we'll see how this thing plays out. But I think
00:08:38
Speaker
The broader issue, just to kind of start the table set here, nobody thinks about liquidity on the way up, right? When an asset's going up, there's always plenty of liquidity. There's people coming in, there's people cashing out, and it's just not top of mind. It's just something that people take for granted. And when there's, you know, everyone's running for the same exit doors or the same, you know, lifeboats, there's only a few.
00:09:00
Speaker
it gets harder and harder. The worse an asset does, it becomes harder and harder to find that liquidity. And to be able to get out on the way down is not the same. It's a very asymmetrical thing when you think of liquidity. And this is a perfect case in point. This B-Read fund has been gated now for some time. There's a little bit of liquidity they have to make. But for the most part, you cannot get out. Now, the amazing thing here is the magical performance of this fund where
00:09:27
Speaker
While you can't get out at the NAV, the NAV, which stands for net asset value, and we can argue if that's, in this case, an appropriate term, the NAV has barely budged. The NAV on these private refunds are near their all-time highs. Now, when you think about this,
00:09:43
Speaker
This fund, this BREED fund, which is a Blackstone real estate income trust, was remarkably successful. Incredible asset gathering. Advisors in particular love the story. It was all over the wire houses. I think at the peak they were at about 70 billion or so in assets under management. And it's leveraged that they owned about 120, I think, 120 billion in total real estate. This is a massive fund now.
00:10:09
Speaker
Remember, this fund, and there are a couple others like it, there was a Starwood SRE, and there's a KKR, and these funds had been the largest buyer of commercial real estate right up into the peak.
00:10:21
Speaker
largest buyer. Now all of a sudden when that liquidity switch turns, when buyers become sellers in the fund, the funds themselves have to become sellers. So what happens to the commercial real estate market where the largest buyer all of a sudden becomes not only the largest seller but in some cases a forced seller where they have to sell. What happens is you get a freeze up in the liquidity of the commercial real estate market and that's exactly what happened.
00:10:45
Speaker
So the way a REIT, the way a publicly listed REIT comes to its fair value is on a secondary market. They all trade. When a market's open, you can buy them, you can sell them. And the price, the transactional based NAV, the transactional based price, means that's where buyers and sellers are willing to meet in the middle, not just in terms of what they argue or think is the valuation, in terms of dollars. They're willing to buy it. They're willing to sell it here. The trade goes off. That's a number that you can feel comfortable with. Somebody voted with their dollars.
00:11:15
Speaker
These funds are a little different. They use an appraisal-based nav system, which means that you have human appraisers typically come by about once a year, and that brings in a whole bunch of issues. One is there's a human bias. You're anchored. If you personally are valuing an asset, you've anchored yourself to the previous valuation. And you're very unlikely to say, hey, when I looked at this thing last year, I was completely wrong. The market's down 20%. I'm going to mark it down 20%. You yourself are incentivized
00:11:42
Speaker
Now, I'm not saying that they're being dishonest, but the incentive, you have to look at the incentive. The incentive is to keep it high. They charge a fee at the NAV, at the total value, which is incentivized to keep it high. There's also a lag. If you look at a property once a year, and you're looking at a pool of 100 properties, you probably get to about, give or take, 8 to 10 per month, which means that there's a whole bunch of them that you haven't looked at until the cycle comes around.
00:12:08
Speaker
in a normal market environment, that's not a big deal. But in an environment like we had where real estate turned, you know, all of a sudden, based on, you know, the rate curve spiking, all of a sudden, the value of these things turned very quickly. Well, it takes a while for the NAS to come and to catch up.
00:12:24
Speaker
And I'd have to think, just thinking just real estate in general, right? You can do things that aren't totally honest in that realm, right? Because if commercial real estate markets are frozen, that means transactions aren't happening. So it might mean that you have to keep lowering the price that you're trying to sell it at, but you don't have to actually realize that
00:12:46
Speaker
you know, comp until it actually sells. And if it's not selling, you don't have to realize it, no matter what it's listed at. So, you know, I think that there's that aspect of
Concerns About Appraisal-Based NAV Systems
00:12:56
Speaker
it too. Is that, would that be accurate? Yeah. And so a couple of interesting things have happened since they've gated the fund. Blackstone has sold out of Beery. They've sold some of the inventory at prices that are similar or even better to the NAV. And they've pointed to say, look, here, we sold this property and our NAV is accurate because we sold this little property or that property, right?
00:13:15
Speaker
But they've sold the best of what they own. They've sold the few properties that they can sell at those peak valuations. So, you know, does that matter? I think it kind of helps their case a little bit, but certainly not conclusive to any degree. And the way that they're paying off the liquidity, the way that they're funding the liquidity that they're providing is not by and large through mass sales of all their properties. It's through inflows. It's people coming in.
00:13:38
Speaker
So when you're taking people's money, people are investing, they think they're investing into real estate. You're using that money to pay off either the dividends or the liquidity of people that are trying to get out, right? Modified pyramid scheme, a scheme you got going on there?
00:13:52
Speaker
I mean you can write it can appear that way. So I think you know look these funds have done very well for if you've gotten early to these funds you've done well even with you know we think there's a significant divergence between where their knives are set and where they their knives would be if we did an apples to apples comparison based on cap rate or different real estate metrics to where the public market rates are. There's a massive divergence but let's put that aside.
00:14:16
Speaker
If you've gotten into these funds early, you've done pretty well. And you want to be patient and wait it out. There's certainly nothing wrong with that. But for new money coming in, the opportunity to invest in publicly traded REITs at what we think is at least a 30% discount for the same apples-to-apples property when you normalize for every external factor, it's just pretty shocking that anyone would even have to think twice about it. No, I agree. And put bass in us as always. Always.
00:14:46
Speaker
Talking about, you know, this mark to market versus being able to do what private equity does, which is not mark to market every day. And how, of course, there's less volatility in those markings because you're not doing it every day and you have a little bit more flexibility because you aren't working in the public market so
00:15:05
Speaker
it's not as much transparency into how those markets are coming. I mean, most firms, I mean, we do due diligence on everybody in private equity and venture capital. We, as part of our due diligence process and all our DDQs that our advisors can look at, we actually make them talk about how they do their markings to get the nav of the fund and how they come up with that. And you can make a decision one way or the other, whether or not you think that's fair or whether or not they're
00:15:33
Speaker
playing in a gray area. But, you know, it's important that they tend to tell you. But, you know, you can look at them and decide, oh, this is a little bit around the edges, or this is, you know, clear as day, and I am comfortable with that. And I think that that really, you know, points to why there is some benefit in the public markets now. We're the alt people. And so we believe that there is benefits and less liquid.
00:15:59
Speaker
alternatives for a variety of reasons, because in less liquid markets, there's an information edge that you can't get in public markets. There's an opportunity there where you can hold on to things longer to realize the opportunity. You're not forced sellers necessarily, unless there's a situation like we saw with B-REIT. But even if you are forced sellers, you, as you pointed out, can always sell your best stuff first. We saw this before the financial crisis when we had
00:16:26
Speaker
issues with capital calls for esoteric, less liquid things where a lot of hedge fund managers would sell their large cap value to meet those cap calls because they were the most liquid and they weren't going to take the biggest hit on them. That all grew in the private markets as well.
00:16:42
Speaker
You can be more patient and you can do things like gate a fund to make it so that you don't have to be fire-sailing your portfolio. There's so many things that you can do in the public markets that is positive, but also in the private markets that protect investors like gating. As much as people hate gates, the reason people do it, the reason funds do it is to avoid fire-sailing and in some way to protect their investments and their investors. But in this particular case, I think most advisors
From PRVT to REAI: Public Market REITs
00:17:12
Speaker
did not fully understand how these concepts work. And when push came to shove and they had questions, there was nobody there to answer them. Because these big firms don't tend to have advisor marketing teams and advisor relationship teams. And these are small tickets usually coming through some sort of feeder. So that is problematic. But that brings us to where you went next.
00:17:35
Speaker
and where you're going from here, which is this entire experience kind of led you to see an opportunity in the market. So let's talk about PRVT and where PRVT is kind of transforming into.
00:17:48
Speaker
Yeah, so we just rebranded PRVT. We're calling it now REAI, and it's the Intelligent Real Estate ETF. And what we're trying to do here is we're trying to provide public market REITs, which we think are a great buy now, but to use a technological edge to give people better and differentiator returns. And let me just kind of react a little bit to what you just said, because there's so much there. Do you edit this, or are we just live straight through?
00:18:16
Speaker
We are just live straight through. All right. So, so I just want to like, you know, what Cliff talks about when he talks about this issue, he talks about the volatility laundering. And I think that's just so important of a concept because, you know, a sophisticated investor like you, Shana, like you know, to manage for what's called the smoothing effect, which is just the
00:18:37
Speaker
frequency of reporting, a public market fund might have daily or even real-time reporting, whereas a private fund might have quarterly or whatever it is. So of course, you look at something less frequent, you're going to see less ups and downs. So that's called the smoothing effect. And there are ways to manage two different portfolios that report performance in different time frames to manage for that.
00:18:59
Speaker
What a lot of sell side funds are doing is intentionally showing the difference in either risk adjusted returns or just the risk without any smoothing effect. And if you're not a sophisticated investor and you don't know to manage for the smoothing effect, you can be tricked by it. And that's something that I think Cliff has really led the industry in pointing out and is really important for investors to understand so they don't get duped.
00:19:25
Speaker
So, you know, I wanted to kind of hit on that a little bit. And the gate, look, as far as the gates go, you know, the first thing I think we all think about is, you know, in the big short where there were, you know, mismarking the, you know, the CDOs. And it's like, of course, yeah, obviously there are instances where it might turn out well, but the fact is that there is a concept called the liquidity premium, right? That you should pay more or be willing to give up either in fees or in returns, give up something for more liquidity. Liquidity is a good thing.
00:19:54
Speaker
And that concept of liquidity premium has been turned on its head where now I think there's a perception or like a marketing feel of illiquidity premium. Oh, anybody could go buy an ETF. Anybody can buy a mutual fund. You want something exclusive. You want something a private fund. Oh, that's a liquid that that just on the basis of it being illiquid.
00:20:15
Speaker
requires a premium. And I think investors need to stop and think about that and think about liquidity being a good thing, a net net good thing. And I agree with you. I don't ever talk about it as a liquidity premium. I actually agree with you. You're going to have to pay a premium for liquidity, which will
00:20:32
Speaker
ultimately chip away from the potential of excess returns, right? Because you're paying a premium. That's what happens. You want that safety. You pay for it somehow. You take less risk. You get less reward. That's just the nature. So I've always looked at it as, yeah, there's a liquidity premium. And for those who need the liquidity for comfort, there's something there. But it's a risk-reward exercise. I've always said that there's alpha in illiquidity, but that doesn't mean you should pay up for it.
00:21:00
Speaker
It's a risk reward. You're taking greater risks. So you should expect a greater reward. And that is what you should go into those reviews and research when you make those determinations is I am taking a greater risk by this being less liquid. I should expect a greater reward and vice versa. And I think that's the way advisors, clients, or anybody investing in this space should look at it as if I'm going to have less liquidity, I better be getting something for that, not paying up for it. That's right. Yep.
00:21:31
Speaker
Yeah, so I agree with you wholeheartedly. I think, you know, let's talk about sort of what your goals are with your new product. And sort of, I want to really talk about how this whole B-REIT thing kind of brought you here because I know that everything when you started PRBT, it came out of sort of that B-REIT
00:21:54
Speaker
like fiasco and now as it's evolving the reason and it has evolved has to do with what you're seeing in the marketplace as you kind of thought about it one way and now it's evolving into something else.
00:22:06
Speaker
We're constantly evolving. The first thing we did when we started with House and yourself included was do a competitive analysis. Where are people investing? Where can we do better? Where's our edge? There were two huge pools of capital where the REIT assets were really dominating in terms of flows. One was market cap weighted index funds.
00:22:28
Speaker
that's everywhere that's across the board but even more so for whatever reason even more so in real estate even more so in REITs and when you look at ETF flows and ETF market even on the fun side now that's an interesting thing because we could debate the merits of market cap weighting versus you know smart beta or different strategies broadly with equities but when it comes to real estate
00:22:50
Speaker
a REIT doesn't necessarily exactly precisely mean real estate. It kind of does, it sort of does, but it doesn't exactly. What REIT really means is a tax treatment that somebody's elected to, you know, a CFO has elected for the REIT tax treatment, right? So when you look at the broad, you look at like V&Q or the broad REIT, you know, passive funds, they're loaded with
00:23:12
Speaker
cell towers, data centers, hospitals, senior housing, all sorts of things that, yeah, maybe I can kind of put it into the real estate bucket sort of ish, but it's not exactly pure real estate. And I think a lot of people that invest in those funds and those passive REIT funds think that they're getting a bogey for real estate. And it's not a totally imperfect correlation, but it's not perfect. It's far from perfect.
00:23:37
Speaker
The average investor is thinking about real estate in residential sense, which there isn't a lot in that. And I always remember sitting in manager meetings with value managers that managed against a value index that had a lot of REITs in it. Once REITs get added as a separate thing. And they always used to say the same thing. There's a bunch of stuff in that REIT bucket that's not REITs. It's debt. It's mortgage stuff. It's not real estate. So I don't buy that. And so to your point, yeah.
00:24:06
Speaker
The other big pocket of capital that was attracting were private refunds and B-read. And we started looking into that and trying to understand it and learn more about it. And the more we saw, the more red flags are raised. And that's what got us looking into it and talking about it.
00:24:21
Speaker
Our focus as a company has shifted too. Harping on the flaws of the other products doesn't necessarily help us. We want to share our findings with investors because it's the right thing to do. If my mother was invested in this fund, I'd be taking her out of it for these reasons. So we do have a bit of a moral obligation to mention it, at least to some degree. But our focus has been on implementing machine learning technologies in our read analysis.
00:24:48
Speaker
Another finding, yet another iteration of these projects was seeing that the fundamental research that a lot of active managers were using, the efficacy of it was just waning. And this is probably across the board with equities, but we're seeing this a real estate too, that the real estate analysts and a lot of the active managers were looking at the same metrics, the same fundamental metrics, same valuation metrics, and there just wasn't a lot of edge to
AI and Machine Learning in Real Estate
00:25:14
Speaker
be had.
00:25:14
Speaker
So we merged with a company called Arialgo, which is an AI and machine learning specialty company focused entirely on real estate. And that merger is completed. And now we have these models. And we're continuing to build on the models that takes in real estate data. So private market, as well as public market, written real estate data, as well as geographical data from different areas. And we have a number of models now that are running. Again, these aren't, we're not like,
00:25:41
Speaker
It's not a total black box. We're not just having this thing spin out returns. What we are doing is we're able to do more calculations than we could ever do until before this new technology was available to us broadly. And we're able to do all sorts of cross correlations and basically make some regression analysis look like someone did it with crayon. We're able to do some super advanced calculations. And a lot of the findings that we've come up with are kind of noise. They're not that interesting. Some of the findings are extremely interesting.
00:26:11
Speaker
And we think we've got now some proprietary edge to manage REITs in an ongoing basis using our proprietary technology. So we've built some products, some indexes. We're managing the REAI ETF with some of the technology. We have to make some changes from a compliance standpoint in order to implement all of it. We're working on that right now. So we're going to get there. We're working on some partnerships and managing some money for institutions through SMAs, because now we've got something that's truly
00:26:41
Speaker
differentiated not just in terms of what we're doing in our approach, but also empirically through the return stream and through the correlation of our return to other strategies. So that's what we've really been excited about and focused on as a company. And, you know, continuing to expand our data set, continuing to train the models in different environments and training them so that they don't just perform in the environments that they were trained like a backtest would.
00:27:04
Speaker
but that they're flexible enough that they can create their own environments and train themselves based on what the market is or might be reacting to based on other signals in the future. So it's super exciting and we think we're early here and that we can take a lead in this category.
00:27:21
Speaker
Yeah, I agree. AI and machine learning is such a huge part of this. We're using it in a different way, more so to help simplify the subscription process on the private market side. We think that there's too much complexity that keeps advisors out of the market.
00:27:39
Speaker
You know, having to hire more people and have different compliance and so on and so forth. And it's a hassle and it's expensive and that's largely what's kept the vast majority of advisors out of the alt space, especially the private alts beyond some of those feeder vehicles.
00:27:55
Speaker
But I'd love to hear now that you're kind of developed this new approach, this machine learning. We talk about real estate all the time. Every time the Fed comes on and talks about interest rates, there's always discussions about the housing market and real estate and what does that mean. So we've seen a lot of crazy stuff going on in the real estate market broadly since the pandemic. We saw
00:28:19
Speaker
massive boom in residential and a massive bust in office. We've seen booms in a lot of, you know, distribution centers, things of that nature, Amazon, like logistics kind of things. That's done great, but other things have not done so well. So where are you guys seeing opportunities? Where in the market are the true opportunities for people who are interested in the real estate space?
00:28:46
Speaker
So the market's always going to be fluid, right? To an extent. So, you know, you might not air this immediately or, you know, I like to kind of speak in, you know, evergreen terms, things that can always make sense. You know, but I will say that, you know, like I talked about early on, the degree of permanence and sustainability and durability of
00:29:06
Speaker
physical real estate is is real. Now, if you can account for leverage and rate sensitivities and things that are outside of the actual building and owning and managing of real estate, then there can be a real long term case to be made. But the market's going to respond to different factors at different times.
00:29:25
Speaker
You know, I think a lot of the factors that people are using now to, especially on the quantitative side where I am, the factors that people are using to derive signals for, you know, real estate on a subsector level on the individual security level and as a whole, you know, as an aggregate are basically
00:29:43
Speaker
in many cases are either identical or very similar to equity factors. So people say, all right, I'm going to start with the Fama French framework, or I'm going to start with, you know, here's my, you know, my rate sensitivity on a broad equity level, or even some people looking at, you know, the, the, you know, the spreads and the dividends as as, you know, more of a fixed income bogey. Okay.
00:30:02
Speaker
We think that there are real estate specific metrics that are far more instructive on valuing these things. And in the private market, the factors that people look at for real estate investing are very different. Obviously, regional data is hugely important. What is the population growth, the employment growth, the occupancy, vacancy rates, the supply demand? There are so many factors. And on the public market side, people are like, well, what's the PE? What's the momentum? I mean, they're looking at traditional factors.
00:30:32
Speaker
And in between those two is a huge gap. And here's another gap, a completely different gap, but another gap. The volatility of REITs, or publicly traded real estate, and the volatility of real estate separately, privately owned real estate, is completely different. Not only is the public market much riskier based on publicly used risk metrics, they even move in different cycles. They even respond to different things.
00:31:00
Speaker
So in between those two is another huge gap, right?
Risk Profiles: Public vs. Private REITs
00:31:04
Speaker
And each of those gaps, the risk profile of public versus private REITs and the factors that people are using to drive signals based on public and private REITs, those two gaps, that's our opportunity. And that's what we see. That's where we are entirely focused. How do we take these private real estate market signals
00:31:22
Speaker
and apply them to public market reads where they matter. How do we take the public market signals and see what that means for a private market reads? And how do we take the two risk profiles and when they diverge, bet on a convergence, when they converge, bet on a divergence, and do it in a way that we can make money in any environment? And that's been our focus. And there's going to be a lot more coming from us on that. Yeah, I think that's really interesting. I always like to talk to investors when we talk about real estate as part of ALT.
00:31:50
Speaker
You know, REITs, as you pointed out, that's a tax treatment, not necessarily pure real estate per se, participating in the ownership of something that's affiliated with real estate, but maybe it is or is not actual real estate. Whereas on the private side, private REITs aren't drastically similar, but then there's private real estate.
00:32:14
Speaker
where you actually own the property and share the property. There's a lot of different ways to do that. There are private funds where you can literally
00:32:25
Speaker
create a white label product and they go out and buy a building and it's yours and you put it in a fund and that's your white labeled version they're usually triple net lease is the most common way i've seen that done. But you know that that's all very different from each other and to your point, they all have to be looked at and evaluated very differently, and I think the easier one.
00:32:47
Speaker
believe it or not, to evaluate is that I'm going to go buy a building and put it in a fund. And it's my fund, and I own this building. My fund owns the building. I own that building. And that is easier than when you're looking at these pools of money where you're owning like fractional interest in a lot of things. And I think when it comes to either private read or public read, that's still something you have to take control of. So when you talk about these gaps,
00:33:13
Speaker
You know, how does the average person obviously invest in your product, obviously? But how does the average person kind of need to change the framework of their thinking as they go and look at opportunities in the real estate markets through REITs, whether public or private?
00:33:30
Speaker
It's not easy. It's not easy to do. There's no easy answer. I mean, I think, you know, a lot of people need to see this in every, you know, probably in every conversation you're having for the podcast and every asset class, people are going to chase performance, right? Which means that they're going to go in at peak valuations at the worst possible time. They're going to come out when things are down at the worst possible time. And I think they should think about real estate as a more permanent asset, as a more stable asset, regardless of of public market volatility, as a stable asset.
00:33:57
Speaker
and use those downturns as opportunities to buy and hold and use those upturns as an opportunity to take some chips off the table. And I think that's a very basic buy low sell high, but I think that makes a lot of sense, especially in this asset class. And that's a decent framework to start. Ultimately, at the end of the day, we think that we can quantify these things and we think that we can offer investors products that really take advantage of them. The market doesn't always
00:34:21
Speaker
you know, it's not a one to one. It's like I turn off the switch, right? The lights go off right away. If I make a trade, as you know, sometimes it moves against you and there are different factors of different timeframes, right? So, you know, some timeframes play out over, you know, a two, three, four year cycle. Some are more like, hey, this is a signal for the next three weeks. So it becomes very complex, but we think that we can manage these things using the models that we have, the machine learning models that we've implemented. And that's, you know, we're refining them and we're,
00:34:51
Speaker
getting ready to put them out in the market. Yeah, it's interesting. I remember, you know, we'd always be on these calls with Justin early on when we were getting ready to launch house. And he always used to say like, for the average person, real estate is the ultimate investment that can make sense, because everybody has to live somewhere, right? There's a roof over the head, whether you buy it, you rent it, whatever, you know, real estate is personal. And I think to some extent, you know,
00:35:16
Speaker
when you think about it in terms of broad market and you've touched on equities and fixed income you know the one thing that real estate actually does have that those others don't is it's far less um you know it's much more tangible right like there is a building it is in a place and we have some idea what the the area is doing you know how the real estate works there and how people uh
00:35:42
Speaker
transact within those physical real estate deals. There's a limited supply. We know that, right? It's like, there's not unlimited land. So there's limitations in there that that is not the case when you're looking at things that are less tangible, like equity, right? So equity is a share of interest in a public company, but it's an intangible, right? You can't go and physically touch Google
00:36:09
Speaker
You can't physically touch a lot of these things. You have to take management for what they say. You have to come up with literally, in many cases, out of nowhere, an idea of what that might be worth based on a whole number of factors that we consider. But real estate is a little different. So for the average investor, I think that real estate can be a good place to start now.
00:36:37
Speaker
There are TikToks and there are people all over social media that like to talk about can't make money unless it's
Real Estate vs. REITs: Pros and Cons
00:36:43
Speaker
in real estate. It's the only place you can make money. And I broadly disagree with that, you know. But I think if you're going to do real estate, you're better off in some of these vehicles versus like physically going and building building, buying buildings where now all of a sudden you have to
00:36:58
Speaker
Yeah, they're tangible and that's great. But then it's also tangible maintenance and tangible costs involved in upkeep. That's exactly right. Yeah, one one bad tenant and it can really it can really affect you personally. And if you get in calls in the middle of the night because of a leaky toilet. Now, a lot of people have done very well in private real estate.
00:37:17
Speaker
But there's a lot more to it. And, you know, you talk about the tick tock investors. I think, you know, as you and I know, and, you know, institutional speak, we would distill their wisdom, their advice down to leverage right to one word leverage. Right. That's for the most part. That's the advice for different different schemes to apply leverage. Right. And that's great if you happen to catch an upcycle.
00:37:37
Speaker
And your leverage, you can do quite well, obviously, but that is more akin to gambling than investing. I think with investing, we can find ways where we can smooth out the return stream over longer periods of time, own things that make sense to own and do right by investors.
00:37:56
Speaker
Yeah, absolutely. I think this is really helpful. We talked to a lot of people who are interested in real estate. Obviously we work with folks on the public side and the private side. You know, we're always talking about opportunity zones and things in that nature in the real estate.
00:38:11
Speaker
world opportunity zones for those who aren't aware, special tax treatment on certain real estate in certain underdeveloped areas or up and coming, if you will. There's a lot of benefit in that. There's definitely interest when people think about private alts. Tax efficiency is not the first thing you think of, but things in the real estate world actually do provide some tax efficiency. So I think that, broadly speaking, real estate is very much an alt.
00:38:40
Speaker
And it's not traditionally been an all in the REIT world, but some of the products you're working on are really differentiating themselves as alternatives because they're offering you a different way to access real estate, a better way to access real estate. We're actually getting some of the diversification of benefits of that real estate, which traditionally REITs have not necessarily offered because they've been more equity beta. That's right. Yep.
00:39:08
Speaker
Yep. So I will close this conversation up just saying you got to look up Phil. If you don't follow him on Twitter, you have to for no other reason than because he will always brighten up your timeline with some of his, uh, what is it? Memes are for weekend weekends or for memes or something like that.
00:39:26
Speaker
My favorite. He always has really great stuff. We'll put a link into his sub stack where you can look at some of the analysis he's done, which I think is really interesting. He's done a lot of work, not just in the real estate market. You've done some really interesting work just on the industry in general. Feel free to promote the most recent one you did, which is having to do with asset managers and ETFs and things of that nature.
00:39:53
Speaker
Yeah, talking about media. Yeah, yeah. Or the serious people one. Yeah, I mean, you know, we're a little bit about some of the ridiculous, you know, the Bitcoin ETF race with the SEC was just fascinating to watch. I mean, I'd been in this for a long time. I'd been at the exchanges managing these launches. I'd been a product developer. I know the process very well. To see it play out the way it did where the SEC
00:40:19
Speaker
just couldn't get out of its own way. They had their own process to see all the asset managers, you know, the ones who were pro Bitcoin, the ones who were against us piling because they saw an opportunity then to see the fee war, right, that you have an ETF to see a play out before the products even launch. So that at launch, nobody's even making any money after all the effort of a decade after all this effort. And then, you know, the announcement itself of the approval was botched by the SEC. Somebody hacked into their Twitter. I still don't believe that.
00:40:48
Speaker
I think that is the worst cover-up attempt ever. In my opinion, because it's not, if you're going to hack the SEC's account, is that really what you're going to do when you know, like the announcements the next day, right? Right? Like if you're going to hack the SEC's account, like that's not going to be the tweet you send.
00:41:08
Speaker
I agree with you. I mean, highly suspicious. Very, very skeptical about the explanation. Meanwhile, though, be that as it may, the market for Bitcoin is blowing around. It's fluctuating up and down based on these announcements. And I mean, this is like serious market structure. This is like a real thing here. We've got, you know, these asset managers losing their mind. They're all desperate. You've got the SEC is all bureaucratic. You've got Bitcoin people that are just like, hey, number go up, number go up. And so, you know,
00:41:37
Speaker
If you can't take a minute to stop and appreciate the ridiculousness of it, to grab some popcorn and enjoy the circus, then I think you're really missing out on something. So I wrote a little bit about that just to try to have fun with it because we do live in absolute crazy times when it comes to these markets. So hopefully people can enjoy it.
00:41:56
Speaker
Oh, absolutely. And so I'll put a link in there because, again, I enjoy your posts. I enjoy your subjects. I enjoy your content. And I think our listeners will too. But thank you very much for joining us today. You know, like Phil mentioned, I worked with Armada early on when they launched House.
00:42:16
Speaker
really came around to my understanding real estate better. You know, like Phil, I thought it was pretty boring. But the more you get into it, the more interesting it can be. And I can tell that you have completely become passionate about it, because I know where you started and where you're ending it, or you're at right now. So it's definitely an interesting place. You definitely should follow Phil, read his stuff.
00:42:41
Speaker
Look into what I'm out is doing this new ETF and the rebranding that they're doing. It's a game changer. So I will put all that in the show notes and all the links. So our viewers and our listeners can see that. But thank you again, Phil for joining us. We've really enjoyed having you here. I've been trying to get you on for like a year and you never responded to anybody's emails.
00:43:02
Speaker
But, you know, the Lions start winning some games and I can get you to respond to some text messages and we finally were able to get you on. Sorry. I appreciate it very much. It's great to do. And let's do it again. Absolutely. Thank you so much for joining us. All right. Thank you. The opinions expressed on the What's the Alternative podcast are for general informational purposes only. And I'm not intended to provide specific advice or recommendations for any individual.
00:43:34
Speaker
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00:44:02
Speaker
As always, please remember, investing involves risk and possible loss of principal cash.
00:44:23
Speaker
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00:44:28
Speaker
which can be obtained from the financial profession and should be read carefully before investing. State institutions and individuals represent the opinions of that individual as of the date of the published podcast and do not necessarily reflect the opinions of Byron Capital 19 or its affiliates.
00:44:44
Speaker
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