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Blackstone buying American Campus Communities ‘fits squarely’ with its business: Real estate investor

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Land and Buildings Founder & CIO Jonathan Litt joins Yahoo Finance Live to discuss Blackstone acquiring the student housing company American Campus Communities (ACC).

Video Transcript

BRIAN SOZZI: Blackstone has struck a $12.8 billion deal to buy the student housing company, American Campus Communities. For more on this deal and what's shaping up in the real estate space, we have Jonathan Litt, Land and Buildings founder and CIO with us. Jonathan, good to see you this morning. So what do you think their play here is Blackstone?

JONATHAN LITT: Sure, it's good to see you as well. Thanks for having me on this morning. The student housing business is a terrific business. There's more kids going to school every year. And the big public universities are seeing admissions growing. And Blackstone has been focused on residential housing and warehouses principally. And I think this fits squarely in the program that they have of buying in the residential space, and that there is a shortage of housing in America.

JULIE HYMAN: And Jonathan, we should note you're a shareholder of American Campus Communities. And you had been agitating for some change at the company, including trying to get a couple of board seats there. I imagine you're pretty happy with this outcome. I think you own, what, around 1 and 1/2 million shares?

JONATHAN LITT: That's correct. Yeah, so we got involved-- we've known the company since its IPO 18 years ago, know the CEO. It had really underperformed going into the pandemic for five years. And so we were not an investor. There was some company-related issues, not property-related issues. So we got involved after the pandemic. The stock was around $35. We approached the board. We said, let's fix this thing. This should be a top performing company.

And we got three people on the board, investment committee, and they were doing a very good job. But they still weren't getting to fair value. And we said to them, look, we think the fair value is meaningfully higher than when the shares are. Why don't you go talk to folks who might buy the company? And to their credit, they did. And Blackstone paid, I think, a fair price for this portfolio of student housing.

JULIE HYMAN: And Jonathan, when I look at your portfolio and the companies within it, it seems like it's pretty company specific. In other words, you're not seeing necessarily a big theme in particular subsectors of real estate. I don't know if that's fair to say, but I'm curious if you see a bigger opportunity within college housing or if you think it was sort of limited to this particular company.

JONATHAN LITT: So this was the only publicly traded student housing REIT. So it's a little bittersweet that it's getting bought by Blackstone because we won't have the ability to invest in student housing any longer. But I would say there is a theme to our investments, and you just showed some of our positions. And that is, you want to own today inflation-protected real estate.

And not all real estate is inflation-protected, but some of the names which you showed where you're going to have very strong rent growth because there's limited supply, which is really the housing business, whether it's single family for rent or apartments or manufactured housing. We're going to see strong rent growth, more modest expense growth, high margins. Those stocks are going to do really well.

Warehouse stocks, we own Rexford today. Rexford has 50% mark to market on its rents. That's how much rents have gone up in the warehouse space. And so they're going to enjoy multi-years of very strong earnings growth, as they just get the rents to market, let alone additional growth out of that portfolio. So there is a theme. We're focused on this inflation-protected real estate that's seeing very strong demand and limited supply.

BRIAN SOZZI: Jonathan, are there companies in this space that are not well positioned to handle a land of higher interest rates?

JONATHAN LITT: We think so. And we think New York office, unfortunately, companies that own older office buildings in Manhattan, such as Empire State, which owns the Empire State Building, are really poorly positioned. They're going to struggle with getting rents up. In fact, rents are going to be down. And their expenses are going up. It's a lower margin business. They have very substantial expense growth.

And so we think they're really going to struggle. They're not going to keep up with inflation. The values are probably going to deteriorate. We have a record amount of leasing that has to be done in the US and the office market this year because people have been extending for short periods of time. So I think the office market generally is going to struggle. And New York older assets, like Empire State owns, are going to really struggle the most.

JULIE HYMAN: And do you think we've sort of entered a new-- or that we saw a real, long lasting secular shift in demand for office space because of the pandemic? Do you buy that thesis that people are not going to come back to offices in the same numbers maybe ever?

JONATHAN LITT: You know, that was our call in May of '20, when we heard, whether it was Blackstone or Morgan Stanley, CEO saying, hey, this is working. We don't need as much real estate. We were like, what? It's going to be a problem. We think there's going to be about 20% less people in an office building on any given day once we get back to normal. By the way, today, there's just 30% of pre-pandemic people in the buildings. So we do think it's a secular challenge for office.

Now, we reserve a decision on that until we really see what happens now that the mask mandate's off and people can return to the office. But, you know, I think remote work is going to be a permanent feature, and I think there's going to be a real struggle for traditional landlords. I think the WeWorks of the world are really well positioned because in this period, where you have uncertainty about what it's going to look like, and WeWork offers you either a month to month, or if you're a larger business, one-year or two-year lease, that's a good way to go. And then you kind of can see how your business develops after that.

JULIE HYMAN: Jonathan, it's good to catch up with you again. Don't be a stranger. Jonathan Litt, Land and Buildings founder and CIO, thanks so much.