Bill Chen on why the opportunity exists right now in publicly-traded Real Estate

Episode Summary

Executive Summary: The episode argues that publicly traded real estate, especially large-cap multifamily REITs, is unusually attractive after a 35%-37% price drawdown. Bill Chen says public REITs trade at deep discounts to private-market value while supply is set to fall sharply as high rates choke off new development, creating an eventual pricing-power and NOI tailwind.

Main Topics: Public REIT drawdown and valuation reset (Priority: 5/5): Bill frames the current setup as the best public real estate opportunity in a decade, citing a large price decline in the FTSE NAREIT All Equity REIT index and implying that public REITs now trade at unusually low cap rates and multiples relative to history. Supply slowdown from higher rates and tighter financing (Priority: 5/5): A major thesis is that high interest rates and construction lending pullbacks are crushing new development starts. Because multifamily projects take roughly four years from land purchase to delivery, the supply response is slow and likely to create a future shortage. Public vs. private real estate pricing (Priority: 4/5): The conversation compares public REIT valuations with private-market apartment pricing, arguing that the public market’s discount is too wide given liquidity, balance-sheet quality, and the ability to own diversified portfolios at lower effective risk. Tax, liquidity, and operational tradeoffs (Priority: 4/5): Andrew raises the classic case for private ownership: depreciation, partnership tax benefits, and direct control. Bill counters that public REITs offer liquidity, diversification, lower transaction costs, and far less operational headache. Balance sheets, leverage, and distress optionality (Priority: 5/5): Bill emphasizes that large REITs are conservatively financed, with long debt ladders and retained cash flow, giving them flexibility to buy distressed assets or repurchase shares if needed. He argues this makes them safer than heavily levered private owners. Return potential and total-return compounding (Priority: 4/5): Bill argues the current setup can still generate strong IRRs even under conservative exit cap-rate assumptions, helped by dividends, modest leverage, NOI growth, and potential future cap-rate compression. Interest rates, inflation, and macro context (Priority: 3/5): The hosts debate whether the trade depends on falling rates. Bill says it does not, though lower rates would help. He also links housing weakness to inflation moderation, suggesting CPI may drift back toward the Fed’s comfort zone.

Key Arguments: Public REITs are cheap because the market has overreacted to rate hikes and near-term supply concerns, producing a drawdown that historically has often preceded strong five-year forward returns. The 1972-74 example shows REITs can outperform even in rising-rate environments, so the thesis is not solely dependent on falling interest rates. High rates and tighter construction lending are making new apartment developments uneconomic; with a four-year pipeline, today’s slowdown should show up as a supply cliff later. Large multifamily REITs trade around 6%-7% cap rates in public markets versus roughly 5% privately, creating a valuation gap that appears too wide relative to risk, liquidity, and diversification. Public REITs are operationally superior for passive investors: they avoid tenant headaches, reduce transaction friction, spread risk across many assets and markets, and simplify tax/reporting burdens. Although public REITs are conservatively levered, their retained cash flow and access to capital markets give them the ability to buy distressed assets if opportunities arise. Buybacks are not common in REITs, so the absence of repurchases or insider buying is not viewed by Bill as a strong negative signal in this sector. Even with draconian assumptions, the modeled IRR for names like MAA and CPT is still attractive because dividends, modest leverage, and NOI growth compound over time.

Data Points: FTSE NAREIT All Equity REIT index price drawdown: 35%-37% - Bill cites the decline since late 2021 as the foundation for today’s opportunity set. Historical forward return after 30% FTSE NAREIT drawdown: 109% over the next five years - Bill says every 30% drawdown since 1970 has been followed by strong five-year returns. Typical public-market multifamily cap rate at the start of Bill’s career: High 3s to low 4s - Used as historical context for the 2013 environment when returns were harder to find. Private Sunbelt multifamily cap rate two years ago: Around 3.5% - Bill contrasts this with current private pricing to show the severity of repricing. Current private Sunbelt multifamily cap rate: Around 7% - Bill uses this as an example of a massive private-market re-rating. Public REIT cap rate example: 6%-7% - Andrew frames public names like AvalonBay and EQR as trading around these levels. Construction debt cost: Roughly 5% all-in rising to about 10% in stressed examples - Bill says development feasibility has collapsed because financing costs have jumped. Loan-to-value change in development math: From 70% down to 60% - Bill explains how tighter lending reduces project IRRs. Development IRR under current conditions: About 6%-7% - Bill argues this is too low to justify taking development risk. Typical multifamily project lead time: About 4 years - Used to explain why supply cuts today will affect deliveries only later. Expected supply falloff: Delivery cliff in 2025-2026, especially 2026 - Bill says current starts will eventually roll off sharply. MAA fixed-rate notes due 2029: $4 million at 3.4% average cost - Andrew cites MAA’s debt schedule as an example of cheap legacy financing. MAA fixed-rate property debt due 2048: $360 million at 4.4% - Andrew points to this as part of the company’s low-cost, laddered debt structure. MAA net debt relative to market cap: About 20% of EV - Andrew contrasts REIT leverage with typical private real estate leverage. Private real estate leverage: 50%-80% debt mentioned as possible - Bill notes private deals can use much higher leverage depending on lender appetite. REIT payout ratio: 67%-73% - Bill says the big REITs retain meaningful cash flow instead of paying out everything. Total available for distribution: About 6.5% yield - Bill says the dividend yield understates the cash generated by the REITs. Observed public REIT dividend yield: Around 4.2%-4.3% - Used to argue that retained cash flow adds to the return stream. Historical REIT total return since 1970: About 200x - Bill cites this to show the power of dividends in long-term compounding. S&P dividend yield: Below 2% - Compared with REIT yields to illustrate why REIT total returns can compound faster. Public REIT management expense: Around 30 bps of market cap annually - Bill compares this favorably to private real estate management fees. Private real estate management fee: About 1%-2% plus promote - Used to argue that public ownership is cheaper than private ownership. Transaction cost on real estate: About 3% all-in - Bill uses this to highlight how expensive real estate turnover is versus stocks. Stock transaction cost: About one penny per share - Andrew and Bill contrast this with real estate frictions. GFC NOI decline for Mid-America: At most about 5% - Bill uses historical stress testing to show multifamily resilience. GFC NOI decline for AvalonBay: Mid-to-high teens - Bill notes coastal exposure caused a deeper hit than Sunbelt peers. Current enterprise leverage at large REITs: Around 4x net debt/EBITDA - Bill emphasizes conservative balance sheets versus private owners. Modeled IRR for MAA/CPT under stressed exit assumptions: About 8%-9% - Bill says this is achievable even if exit cap rates are unfavorable. Potential IRR if exit cap rate compresses to 5%: About 18%-20% - Bill suggests strong upside if valuation normalizes further. 30-year Treasury / rate context mentioned: About 4.7%-4.8% - Referenced while discussing current financing and macro conditions.

Pivotal Quotes: "this is kind of what I've been waiting for. 10 years." — Bill Chen: Bill describes the current public REIT setup as the rare value opportunity he has been waiting for. "The public market do not want to hold anything going into a period where you're either comp flat or comp slight negative" — Bill Chen: He explains why stocks are pricing in near-term weakness and creating discounts. "the public tends to overshoot on the way up when things are good. It tends to overshoot, and then it tends, you know, to overshoot on the downside as well" — Bill Chen: Bill’s framework for why public REITs can dislocate from private values in both directions.

Implications: If Bill is right, public multifamily REITs offer asymmetric upside: current discounts, falling future supply, and durable cash flows. Investors may want to favor liquid, conservatively financed REITs over direct private ownership for this cycle.