Bill Chen on the current set up for REITs

Summary

• Bill Chen’s rebuttal to the “cap-rate arb never closes” objection is a full total-return algorithm: buy at a 6 cap, knock off 40–50bps of G&A and ~$1,000/door maintenance capex to get ~5.1–5.2% true unlevered free cash flow, add 2–3% rent growth, and layer conservative 20% loan-to-value debt. Under his simplifying assumption that the debt is effectively borrowed at the cap rate, the permanent-hold math reaches about a 10% total return; since many multifamily REITs now trade around the mid-6% range, he says the return approaches 10–11% — no takeout required.
• The reason that algorithm produced only a 7.3% two-year total return for NAREIT is classic capital-cycle theory, and Bill argues the cycle is now turning. Free money in 2021 put “a shovel in the ground” across every asset class except office, deliveries hit in 2024–25 and produced very muted rent growth, but the supply wave is now being absorbed and new-start activity is trending below 20-year averages. AI data centers and infrastructure-related projects are the main exceptions. Because there has been “very very minimal” cap-rate compression, Bill says he is more excited today than on his podcast appearance two years ago.
• Andrew’s case that REITs are “probably a little bit closer to a bond than an equity”: his multifamily NOI forecasts from two years ago landed within 2–3%, versus plus-or-minus 30% for a chemicals EBITDA call. Andrew’s label — “capital cycles for beginners” — and Bill’s kicker: the most multifamily deliveries in roughly 40 years produced NOI down only about 3% over the cycle.
• The corporate-governance and buyback fight centered on managements and boards owning little stock, and Camden’s 10-Q shows $630M of nine-month operating cash flow against just $50M of buybacks versus $310M of development and $334M of acquisitions. Bill defended large blue-chip REITs by citing Camden’s asset sales and buybacks, plus AvalonBay’s roughly $150M of buybacks, while Andrew argued the incremental dollar should go to repurchases. Bill also invoked a fiduciary duty not to let the portfolio age, which Andrew challenged.
• Bill’s anti-buyback Griffin story: the CEO recycled Hartford land through 1031 exchanges into Lehigh Valley warehouses at about 7% unlevered returns, rents later doubled, and the company expanded to Charlotte. Value investors had pressed for buybacks, but after Gordon DuGan joined as chairman the stock popped 20% in one day and the CEO’s strategy received recognition. Griffin was later taken private by Senue and the government of Singapore at double Bill’s cost basis, after growing from under 2M to about 15M square feet. Bill’s point: “not every solution to an undervalued stock is some form of share buyback.” Andrew’s challenge was that the outcome depended on an exceptional operator.
• The takeout wave is real and Bill thinks the private-equity bar is very low: public holders get a 25–40% bump and PE can still win easily. His list includes Inco, Elme Communities, ROIC and Alexander & Baldwin, plus Dream Residential and a hotel-and-resort name; the first four were described as liquidating or taken out, with ROIC and A&B bought by Blackstone. Andrew considered going activist on A&B but rotated capital instead because “it’s such a target-rich environment.”
• Most dislocated corners right now: life science and cold storage (Lineage, Americold, Alexandria at high implied cap rates), anything at 40–50% LTV, and self-storage — “we love our self-storage exposure right now.” Event-driven liquidations are the most dislocated of all on a risk-adjusted basis.
• Five real-estate liquidations are running simultaneously — Bill can’t recall a precedent — and for the first time he’s running 110–130% gross exposure, since asset sales and cash on the balance sheet can return half the capital within one to five months. His underwriting floor is roughly 20% upside, so a 20-to-19.50 low-end revision cuts the MOIC from about 1.22x to roughly 1.15–1.17x. Both flagged that in net-lease office liquidations, the easy-to-underwrite, long-lease assets and multifamily-conversion candidates sold first, leaving a picked-over tail.

Deep dive

1. The hold-forever math: why a 6 cap compounds to 10% without a sale

• Andrew’s opening challenge, the one he says nags at every REIT pitch: a REIT at a 5 cap versus properties trading at 4 caps implies 25% unlevered upside, maybe 80–100% on the equity — “but if you don’t get that sale tomorrow… you just kind of buy them and you get a 5% return forever,” minus G&A drag, while management may redeploy cash into 4-cap properties.
• Bill’s answer is that this framing “is a common misconception” that misses rent growth. His bridge, adjusted to the 6–7% cap rates he says are available: a 6 cap less 40–50bps of public-company SG&A (“when you buy them at scale they run fairly efficiently”) less $1,000/door maintenance capex — a rule of thumb from years of talking to private multifamily GPs — lands at ~5.1–5.2% true unlevered free cash flow. Add 2–3% annual rent growth and you’re at 7–8% before leverage.
• Andrew pressed on the leverage bridge from 8% to 10%: doesn’t debt have a cost? Bill’s mechanism is a simplifying assumption that the debt is effectively borrowed at the cap rate, making the debt expense leverage-neutral while rent growth on the levered slice accrues to equity. Public REITs run ~20% LTV and are “issuing 7 to 10 year fixed rate debt at below 5%,” which Bill says is below their true levered free cash flow. At private-style 50–70% LTV, the permanent-hold return “goes up significantly.”

2. The two-year post-mortem: supply wave in, supply wave out

• The scoreboard is ugly and Bill doesn’t dodge it: NAREIT’s two-year total return is 7.3% — flat to slightly negative on price — which Andrew notes is “fairly brutal” against a booming stock market with stabilizing rates. Bill’s diagnosis: 2021’s “essentially free money” and incredible headline rent growth meant “real estate GPs, every single one of them, put a shovel in the ground” across multifamily, self-storage, and warehouses, but not office. Deliveries landed in 2024–25 and produced very muted rent growth.
• The tradeable turn: management teams across multifamily, self-storage, and warehouses say the supply wave is being absorbed, with new-start activity trending below 20-year averages across essentially every asset class. The only areas Bill says are still getting built are AI data centers and infrastructure-related projects, “because that’s off a different funding source.”
• Why Bill is more bullish now than two years ago: “there’s been very very minimal cap-rate contraction or multiple expansion” — returns have essentially come through dividends, with prices similar to two years ago, so investors get roughly the same starting valuation with the supply headwind easing. Andrew endorses the method: he likes combining capital-cycle dynamics with ground-level industry data to explain why the algorithm did or did not work.

3. “Capital cycles for beginners” — real estate as the forecastable asset class

• Bill’s comparison to their shared non-REIT hunting grounds: forecasting a chemical company’s EBITDA two years out, “I’d like to be within plus-or-minus 30% one of these times” — whereas Andrew says his multifamily NOI forecasts from two years ago came in within 2–3%. Andrew’s conclusion is that multifamily and real estate are “probably a little bit closer to a bond than it is to an equity.”
• Andrew’s framing, worth keeping: this is “capital cycles for beginners” — a bullwhip that barely moves. A stabilized apartment building might be +10% or −2% in two years, “it’s not going to be negative 30 and it’s not going to be plus 50.” Bill’s capstone stat: the most multifamily deliveries in something like 40 years, and NOI fell maybe 3% over the cycle — “I think you’re doing okay.”

4. The buyback fight: Camden’s 10-Q versus fiduciary duty

• Andrew’s governance push: if boards and managements own little stock, get paid well, and do not realize public-market discounts, shouldn’t investors receive some governance discount? His receipts from Camden’s 10-Q: $630M of nine-month operating cash flow, $50M of buybacks, $310M of development, $334M of acquisitions — “the incremental dollar is clearly to me still going to growth.”
• Bill defended the blue chips: Camden is selling its worst older-vintage assets to fund buybacks, AvalonBay did about $150M of buybacks, and new development at a 6% cap rate is “actually a pretty good use because now you get a brand new building.” He also invoked a fiduciary duty not to let the portfolio age — which Andrew flatly challenged: “Why is that a fiduciary duty?”
• Andrew’s reductio, via pharma: if the company traded for a dollar, every dollar beyond baseline maintenance capex should go to repurchases — like the drug company that raised $500M to cure cancer, failed, and trades at $250M: “What do you want us to do, cut the science to buy back shares? Unfortunately the answer is yes… the market is screaming and economics are screaming you need to liquidate this.”

5. The Griffin story: the anti-buyback parable

• Bill’s counterexample, from around 2019 before COVID: Mario Gabelli was publicly pressing Griffin — a complex sum-of-the-parts land story in which Bill was interested — to buy back shares. Had management listened, “they would wind up being more heavily weighted in land in Hartford, Connecticut, and office in Hartford, Connecticut… that entire portfolio would have never evolved.”
• Instead, the CEO sold Hartford land, used 1031 exchanges to move into the Lehigh Valley, and built a modern warehouse portfolio at about 7% unlevered returns; rents later doubled, and the company expanded to Charlotte and other markets. Value investors pushed back on Bill, citing the CEO’s family connection to the board, $7M of SG&A and trading liquidity. After Gordon DuGan became chairman, the stock popped 20% in one day, even though the CEO was no less capable before DuGan joined.
• The payoff: the company was taken private by Senue and the government of Singapore at double Bill’s cost basis three or four years later, having grown from under 2M to about 15M square feet and from a roughly $250M enterprise value to what Bill estimates is now a $1–1.5B company. The moral, verbatim: “Not every solution to undervalued stock is some form of share buyback.” Andrew’s challenge was that this outcome depended on an exceptional operator.

6. The takeout wave: PE’s bar is on the floor

• Bill’s list of names taken out or liquidating, several from his own book: Inco liquidating, Elme Communities liquidating, ROIC and Alexander & Baldwin bought by Blackstone, Dream Residential, plus a hotel-and-resort name a mutual friend owned. Andrew adds Hyatt/Playa: Hyatt bought it, sold the real estate, and the implied value of the retained management-fee stream and operating company means “they got quite the price.”
• The structural observation is Andrew’s: in an environment where public holders get a 25–40% takeout bump, “the bar for PE to make money buying public REITs today is so low, it’s a really easy game for them.” On A&B, Andrew says he considered going activist after the deal produced a 5% portfolio day, but passed because the environment was too target-rich to tie up capital. Bill’s caution is that activism against a well-shopped deal at a real premium risks breaking the deal; it is the bird in the hand versus two in the bush.
• Where the dislocation sits: life science and cold storage screen cheapest without adjusting for leverage — Lineage, Americold and Alexandria at high implied cap rates and low EV-to-EBITDA multiples — while anything at 40–50% LTV tends to show more dislocation, partly because of leverage. Self-storage sold off as a group after Q3 earnings before finding a bid as investors anticipated improving supply-demand. Andrew suspects concentrated ownership — “there’s like 10 guys who care” — leaves few natural buyers when an unrelated REIT hiccups.

7. Five simultaneous liquidations: sizing, slippage, and who’s actually been sued

• Bill’s portfolio shift: for the first time in a professionally managed book he’s running over 100% gross — “call it between 110 to 130” — because event-driven liquidations can return half the capital within one to five months based on asset sales and cash. He says the exposure can quickly fall from 130% to 120%, 115% and 110%, with recurring dividends also coming in.
• Andrew invokes Buffett’s partnership as a precedent for targeting event-driven liquidations with leverage, and notes that today’s names are too small and illiquid for the big funds — unlike the crowded New York REIT liquidation of years past. Andrew’s parallel anxiety: once a $15 dividend is declared on a $20 stock, “is this a 10% position or a 2.5% position?” Bill’s answer is that it is actually a 2.5% position, though it still keeps him up at night.
• On low-end estimates slipping — the old rule was that the lawyered-up low end gets hit “come hell or high water” — Bill’s discipline is underwriting at least 20% upside. A 20-to-19.50 disappointment cuts the MOIC from roughly 1.22x to about 1.15–1.17x; because a $15 dividend would leave only a $5 stub, the 50-cent miss is material to the remaining equity. He does not remember anyone actually paying out after missing a liquidation estimate, though magnitude matters: 20-to-19.50 is different from 20-to-17.
• Bill agrees there is some truth to Andrew’s structural read on net-lease office liquidations: long-lease, easy-to-underwrite assets and assets suitable for multifamily redevelopment sold first, “toward the end you get stuck with a little bit.”
• Andrew’s incentive worry was a hypothetical net-lease-office case: a management team with little ownership and a small management fee from W. P. Carey might sell a property with eight years and roughly $80M of illustrative remaining rent for about $80M, implying no terminal value, whereas an owner with a 15% stake might hold out for more. Bill’s counter-parable is New York REIT, which kept One Worldwide Plaza for value-add with SL Green in a non-traded stub; COVID hit, and Bill thinks the equity was totally wiped out. He also talked to winning bidders: prices that “kind of look low” often hide asbestos or a clause allowing a tenant to back out of part of a lease despite five years remaining.
• Closing note — Andrew says he was up trading “AMCO” on Christmas Eve when a deal closed: “I haven’t been this active in event-drivens within the REIT space in a really long time.” The planned Alexandria discussion never happened; both agreed to a follow-up.