Ryan Dobratz, co-manager of the Third Avenue Real Estate Value fund, likes well-capitalized companies trading at historical discounts. By Shaina Mishkin
If investors in public real estate companies are on a roller-coaster ride, Ryan Dobratz, co-manager of the Third Avenue Real Estate Value fund, is in the front car this year.
The $287 million fund, which Dobratz runs with Jason Wolf, was among the top performers in its category in each of the past three years, according to Morningstar, which currently awards it five stars. This year, however, it is bringing up the rear, with a year-to-date loss of 12% through March 30.
What gives? A confluence of headwinds, including geopolitical turmoil, interest-rate fluctuations, and the threat of artificial-intelligence disruption, have weighed on the sector in 2026 -- and especially the Third Avenue fund's returns. But this year's downdraft makes the outlook even sweeter, in Dobratz's view. "To the extent that you have an active investing approach and you're looking at well-capitalized companies, it is a tremendous time to be revisiting the listed real estate space," he told Barron's in a March 23 interview.
Dobratz also discussed the fund's eclectic holdings, value investing in real estate in the age of AI, and opportunities at home and abroad. An edited version of the conversation follows.
Barron's: Yours isn't an ordinary real estate fund investing in real estate investment trusts. Instead, your holdings include home builders' stocks and trucking shares, among others. How do you decide which companies are a good fit?
Ryan Dobratz: We are long-term value investors in the listed real estate space. We buy into a company, property type, or region that is out of favor at prices below what we think is the long-term value. We are invested across the residential value chain, in select pockets of commercial real estate, and in real estate services companies involved with brokerage, management, and other activities.
We restrict our investments to well-financed industry participants. Our average holding period in the fund is five to six years. It is a low-turnover strategy.
Also, we have focused on real estate operating companies, as opposed to real estate investment trusts, or REITs. Operating companies can retain their capital and reinvest in the business, whereas a real estate investment trust is generally required by law to distribute its net income. The real estate business is capital intensive, so retaining capital and reinvesting without having to sell assets or raise new capital is a structural advantage.
Only 8% of our fund overlaps with the MSCI ACWI IMI Core Real Estate index. Because we have little overlap, we tend to underperform or outperform in various periods. Our mantra at Third Avenue is that our goal isn't to perform all of the time, but instead to perform well most of the time.
Over the long term, that is what we have done. We can look out of step, as we do right now, but our experience has been that if you focus on strategic real estate businesses or platforms that are well-capitalized and trading at significant discounts to conservative estimates of value, the odds of outperforming a more passive index are significantly greater.
Third Avenue Real Estate Value fund historically has had excellent performance, but this year, it is at the bottom of its category. What is holding it back?
There have been a few pockets of weakness for the fund so far this year. We have pretty significant investments in the real estate services companies, which traded weakly alongside the downturn in AI stocks. We have been invested internationally; those markets haven't performed as well as U.S. markets recently.
Higher rates could have an impact on the underlying value of real estate properties. Recent interest-rate volatility has probably impacted the real estate space disproportionately because of its high correlations to interest rates. The other area that has detracted from performance so far this year is Fannie Mae and Freddie Mac.
Our portfolio trades at about a 30% discount to our estimate of net asset value. That is a level we have seen only three other times in the past 15 years. There are times like this when you'll have a geopolitical event or significant market uncertainty, such as during the Covid pandemic. Volatility will increase, security prices will fall, and you can get large disconnects between price and value.
It isn't the most pleasant time to be involved in this space, but for people focused on well-capitalized companies and who take a longer-term view, it is a rewarding time to be invested.
Fannie Mae and Freddie Mac, the government-sponsored mortgage companies, have been under government conservatorship since the 2008 financial crisis. What is the path forward for the pair?
We have been invested since 2020. We have followed the companies closely for longer than that, given their importance to the residential housing market. It wasn't until the government allowed the companies to retain capital again [in late 2019] that we invested in their securities.
We thought their businesses had been reshaped and they were starting to rebuild significant capital. Today, the combined net worth of the two entities is approaching $180 billion, a record. Stress tests say these companies would remain profitable even in a scenario where the unemployment rate in the U.S. exceeded 10% and residential prices fell more than 30%.
They have been profitable investments so far, but a detractor to performance more recently because of market volatility and the view that there are other items for the administration to focus on besides privatizing Fannie and Freddie. The first Trump administration was working on an exit from government conservatorship, and we believe the current administration will continue to do so.
Which companies do you like in the residential market?
Among home builders, we like Lennar. It is a terrific time to buy a best-in-class builder with a strong balance sheet and reasonable valuation.
Lennar and other home builders have enhanced the resiliency of their businesses by moving more land off the balance sheet through option agreements or land-banking structures. They generate a lot more free cash flow than in the past and have been able to pay dividends, repurchase shares, and reinvest in their businesses.
Lennar is unique; it has moved almost all land off its balance sheet through the spinoff of Millrose Properties, a land bank entity. Lennar is now a focused, land-light home builder trading at book value. If the for-sale market improves, the company will improve its margins.
Increasingly, there are opportunities in land-oriented companies, such as Five Point Holdings. We have seen this company make tremendous progress over the past two to three years under new management, but the stock price doesn't reflect it. Five Point acquired the leading land banking company, Hearthstone, and improved its recurring revenue.
Which other builders do you like?
If Lennar is overlooked because of its business transformation, PulteGroup can be overlooked in relation to its Del Webb subsidiary. Del Webb builds communities focused on 55-and-up empty nesters with amenities such as golf courses, pools, and gyms, which put them in high demand.
Del Webb is considered the industry leader. Today it is one of the most important value drivers for Pulte. It is a terrific business that should only get better over time, given the demographic shifts we are seeing.
You are also invested in the manufactured-home builder Champion Homes. What is the attraction?
There have been puts and takes [in recent housing legislation]. Manufactured-housing producers potentially are the biggest beneficiaries of the proposed changes.
The HUD [U.S. Dept. of Housing and Urban Development] requires a chassis for manufactured homes. If the chassis requirement is overturned through these bills, that could give these companies a lot more flexibility and may lead to permitting and zoning requirements becoming easier. If that happens, these companies could deliver a lot more homes. Demand would increase.
Champion is well placed to meet more demand without having to build new plants to satisfy that demand.
If Champion is a possible beneficiary of the puts, which companies could be hurt by the takes?
Companies tied in with [single-family rentals], and particularly build-to-rent platforms, have probably been the most negatively impacted.
One item that came into play in the final moments of writing the Senate's housing bill, the 21st Century ROAD to Housing Act, is the requirement that purchasers of build-to-rent products sell those properties after seven years. That could limit the amount of capital coming in for [single-family rental] or [build-to-rent] products.
Single-family rental companies such as American Homes 4 Rent and its largest peer, Invitation Homes, have been out of favor. AMH is trading at a steeply discounted valuation. The implied capitalization rate is almost 8%, high for the residential space. Another way to look at it is this: You can buy into the company's portfolio through its stock at about $240,000 a home, where the median home price is closer to $400,000.
What do you like best outside the residential space?
It is a great time to revisit CBRE Group, the real estate management and services company. The stock was hit by fears that AI would make the company's transactional businesses less profitable over time. We think CBRE is an AI beneficiary.
The company focuses on larger, complex deals that are less likely to be automated, in our view. Components of those processes can be more streamlined, and thus more profitable. Plus, significant investments in data centers are accruing to CBRE's benefit.
CBRE has built up recurring revenue and improved its balance sheet. The company has a modest level of debt and generates pretty high levels of free cash flow that it can use for opportunistic acquisitions or share repurchases.
We also like U-Haul Holding, the leading player in the self-moving business. U-Haul is the third-largest owner of self-storage in North America now. In our view, the self-storage platform is worth two times as much as the moving business. It isn't a REIT, so a lot of the dedicated real estate groups don't look at it or own it.
What are the best public real estate opportunities internationally?
Internationally, listed real estate is trading at even larger discounts to what we see in the U.S. We focus on developed markets where supply and demand levels are favorable, and markets where there are active prospects for mergers and acquisitions, such as the U.K., Australia, Hong Kong, and Singapore.
We have had a significant number of takeovers over the years, such as National Storage, one of the largest owners of self-storage in Australia. We have been recycling some of that capital into other opportunities, including in the U.K., a market that has been out of favor.
We have a sizable position in Big Yellow Group, the largest self-storage operator in the U.K. It has a great portfolio and a great brand, and trades at an implied cap rate near 8.5%.
Thanks, Ryan.
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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April 03, 2026 21:30 ET (01:30 GMT)
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