Bill Chen on the current set up for REITs

Episode Summary

Executive Summary: Andrew Walker and Bill Chen discuss REIT investing through a capital-cycle lens: how cap rates, leverage, rent growth, and maintenance capex can produce durable returns even when headline discounts appear muted. They also debate governance, buybacks vs. reinvestment, and why a wave of REIT liquidations and take-privates may be creating a rich event-driven opportunity set.

Main Topics: REIT return math: cap rates, capex, rent growth, leverage (Priority: 5/5): Bill explains how a seemingly modest cap-rate purchase can still compound to attractive total returns once maintenance capex, rent growth, and conservative leverage are included. Why REITs underperformed over the last 2-3 years (Priority: 5/5): The pair attributes weak REIT performance to supply gluts from 2021-era development activity and delayed delivery timing across multiple property types. Capital cycle dynamics in real estate (Priority: 5/5): Bill argues real estate is more forecastable than many sectors because supply and NOI are tightly linked, making the capital cycle easier to map than in industries like chemicals. Corporate governance and capital allocation (Priority: 4/5): They debate whether cheap REITs should prioritize share repurchases or continued development/recycling of assets, especially when management teams may not own much stock. REIT liquidations and take-privates (Priority: 5/5): A major theme is the unusual number of REIT liquidations, the likely inefficiencies in these processes, and the opportunity for event-driven investors. Where dislocation is most attractive now (Priority: 4/5): Bill highlights self-storage, life science, and certain smaller liquidation/event-driven situations as the most dislocated areas in REITs.

Key Arguments: A REIT bought at a mid-single-digit cap rate can still generate roughly low-double-digit equity returns over time once you include rent growth and modest leverage. Public REITs tend to be conservatively levered, but even that modest leverage can materially enhance equity returns over a long holding period. The last 2-3 years were weak for REITs not because the basic thesis was broken, but because 2021 development activity created a supply wave that compressed growth. Real estate supply is more measurable than demand, so capital-cycle analysis is especially useful in REITs. Management teams sometimes should recycle capital into development or property upgrades rather than automatically buying back stock, because selling older assets can create more long-term value. That said, when REITs are deeply discounted, share repurchases can be a better marginal use of capital than new development. Liquidations can be inefficient, but they create a special opportunity set because the market is small, fragmented, and often misprices the residual value. Some apparent under-realizations in liquidations may reflect hidden asset issues such as asbestos, lease carve-outs, or redevelopment complexity rather than pure management failure. Smaller REIT liquidations are more interesting than large-cap names because public-company overhead can be meaningful relative to enterprise value. Event-driven REIT liquidations may be compelling because cash returns can arrive quickly, shrinking gross exposure and reducing risk over time.

Data Points: NAREIT total return over past 2 years: 7.3% - Bill cites this as the benchmark for REIT performance over the prior two years. Implied public REIT leverage: ~20% loan-to-value - Bill describes typical public REIT leverage as conservative. Alternative leverage range for some REITs: 40%-50% loan-to-value - He contrasts public REIT balance sheets with more levered real estate capital structures. SG&A drag: 40-50 bps - Bill estimates SG&A burn for large public REITs. Maintenance capex assumption: $1,000 per door - Used in the multifamily return math example. Cap rate example: 6% - Bill adjusts Andrew’s 5% example to a more typical real-world REIT acquisition cap rate. Alternative cap-rate range cited: 6%-7% - Bill says this is common even for large-cap REIT acquisitions. Rent growth assumption: 2%-3% annually - Used to model long-term total return on real estate assets. Long-run total return estimate: ~10%+ - Bill’s estimate for perpetually held, conservatively financed REIT assets. Multifamily supply context: Most delivery in ~40 years - Bill says current multifamily deliveries are at a historic high. Gross exposure in Bill’s portfolio: 110%-130% - He says his professionally managed portfolio is currently running above 100% gross because of event-driven liquidations. Potential return from liquidation: ~20% upside - Bill says he generally wants at least this much upside to underwrite liquidation situations. Repricing from deal announcement: 50% premiums in some take-privates - Andrew notes examples where REITs were taken out at large premiums. Share buyback example at Camden: $50 million - Andrew cites Camden buying back shares while also funding development and acquisitions. Camden operating cash flow: $630 million - Andrew references Camden’s first nine months of 2025 cash from operations. Camden development and capital improvements: $310 million - Used to argue that incremental capital is still going to growth rather than only buybacks. Camden acquisitions of operating properties: $334 million - Andrew cites this as additional capital deployment. Alleged annual public-company overhead for small REITs: ~$20 million/year - Andrew argues this can be a large drag for sub-scale REITs.

Pivotal Quotes: "I think you're missing a few things, and I think this is like a common misconception about investing in real estate and REITs in general." — Bill Chen: Bill responds to Andrew’s concern that low cap-rate returns can be too weak absent an immediate takeout. "The algorithm that we just walked through on like how do you actually generate returns from real estate/slash REITs in general is you have the yield and then you have rent growth." — Bill Chen: Core framework for his long-term REIT return thesis. "I think that this is like the most interesting REIT environment." — Bill Chen: Bill describes the current market as unusually rich for event-driven and liquidation opportunities.

Implications: Listeners should view REITs less as static cap-rate trades and more as capital-cycle businesses with multiple return drivers. The current setup may favor patient investors who can analyze supply, leverage, and liquidation mechanics, especially in smaller or event-driven names.