Rhizome Partner's Bill Chen's post-NAREIT takeaways

Episode Summary

Executive Summary: Andrew Walker and Bill Chen discuss current real estate opportunities after NAREIT, arguing public REITs—especially multifamily, grocery-anchored shopping centers, and select office names—remain mispriced versus private assets. Chen emphasizes strong balance sheets, low distress, slowing new supply, and attractive forward IRRs, while warning that New York politics, office bifurcation, and controlled-company governance still matter.

Main Topics: Public REITs vs. private real estate valuation gap (Priority: 5/5): Chen argues public REITs trade at a persistent discount to private-market value despite stronger balance sheets, better access to capital, and less distress than private owners. Multifamily REIT fundamentals and development arbitrage (Priority: 5/5): The strongest theme is multifamily: collapsing new starts, healthy occupancy, low distress, and cheap unsecured debt create opportunities for public REITs to develop and acquire profitably. New York City residential fundamentals and political risk (Priority: 4/5): Participants discuss improved NYC fundamentals, especially in high-end residential, while noting rent regulation and mayoral politics could affect future development and valuations. Grocery-anchored shopping centers as an underappreciated theme (Priority: 5/5): Chen highlights grocery-anchored centers as scarce, durable, and capable of steady NOI growth, arguing the market underestimates their supply constraint and rent-reset power. Office: bifurcation between Class A and Class B/C (Priority: 4/5): They separate trophy office assets from structurally challenged older office stock, with optimism around well-located Class A properties and caution on weaker offices. Special situations and event-driven REIT ideas (Priority: 4/5): Names like ROIC, Dream Residential, HPP, and Seaport are framed as event-driven or higher-torque ideas where takeouts, restructurings, or repositioning could unlock upside. AI, technology, and operating leverage in real estate (Priority: 3/5): Chen says larger REITs can deploy AI/automation at scale to improve leasing, screening, and operations, while AI’s labor-market impact on Sunbelt migration remains limited so far.

Key Arguments: Public REITs should trade at a premium, not a discount, because they offer liquidity, scale, diversified portfolios, and lower execution risk relative to private assets. Multifamily REITs have strong downside protection: interest coverage is very high, debt is mostly manageable, and many public names have avoided the distress seen in private deals. Higher interest rates have made new development uneconomic, causing construction starts to fall sharply across most property types and setting up future supply shortages. In multifamily, the combination of low new supply, near-full absorption, and stable rent growth supports attractive forward IRRs in public REITs. New York residential fundamentals have improved materially, especially for well-capitalized large REITs, though political risk around rent control remains real. Grocery-anchored shopping centers are rare to replace, benefit from necessity-based tenants, and can generate strong NOI growth through rent escalators and renewals. Class A office in prime locations is not dead; long-term leases with high-credit tenants can now be underwritten more rationally, while Class B/C office remains troubled. Larger REITs have technology and scale advantages that can lower operating costs and improve leasing efficiency versus small private owners. Event-driven situations like ROIC, Dream Residential, and potentially HPP/Seaport can create outsized returns when catalysts such as takeouts or strategic reviews emerge. Management meetings at NAREIT matter because body language, frustration, and tone can reveal strategic intent earlier than the market sees it.

Data Points: NAREIT management meetings: Dozen teams met - Bill Chen said his team met with about twelve management teams at the conference. Interest coverage ratio - Mid-America: 7.2x - Cited as evidence that public multifamily REITs are nowhere near distress. Interest coverage ratio - Camden: 6.8x - Used to compare public REIT balance sheets versus private underwriting norms. Debt service coverage ratio in private underwriting: 1.25x starting point - Chen contrasted private-market lending standards with public REIT coverage levels. Unsecured bond yields: 4.9% to mid-5% (high-5% for lower-rated issuers) - Public REITs can issue seven-year unsecured debt at relatively low rates. Multifamily market-rate starts decline: 70% to 80% drop - Construction starts for market-rate apartments have fallen sharply. Construction activity decline across asset classes: 50% to 80% down - Chen said warehouse, storage, and other starts have fallen dramatically. Occupancy - Mid-America/Camden: Around 95% - Public multifamily REIT occupancy remained strong despite supply worries. NOI decline during period: Less than 2% - Chen said max NOI drop was under 2% for Mid-America and Camden. Income to rent ratio: 21% to 23% - Presented as evidence that apartment rents remain affordable relative to income. Dividend increase - Mid-America: $5.60 to $6.06 per share - Used to show continued cash generation and capital return. Public multifamily IRR estimate: ~18% over 3 years; ~15% over 4 years - Forward model assuming modest rent growth and a 5% exit cap rate. Historical IRR range on earlier purchase: ~14.7% to 24.2% - Bill referenced performance for buys made around 115-130 and held to present. Historical IRR on sale: ~17% to 38% - Bill estimated IRR if sold recently between 155 and 170. Portion of portfolio in multifamily REITs: ~50% - Bill said multifamily is a major weight in one of his hard-asset portfolios. ROIC takeout cap rate: About 6.1x cap rate - Blackstone’s acquisition of Retail Opportunity Investment Corp was cited as validation of the grocery-anchored thesis. Grocery-anchored center supply growth: ~3% annually pre-GFC; ~0.75% post-GFC; below 0.5% recently - Used to argue replacement supply is scarce. Grocery-anchored NOI growth: 4% to 4.5% annually - Chen said renewals and new leases drive strong organic growth. Grocery-anchored cap rates: 7% to 9% - He described buying opportunities in this range for select assets. Dream Residential buy price: ~$7.70-$7.80 vs. $13.30 NAV - Illustrated event-driven upside in a Canadian multifamily REIT. Dream Residential liquidation upside: ~$11.50-$12 net proceeds estimate - After estimated liquidation costs, still materially above trading price. HPP equity raise: $600 million - Hudson Pacific raised capital to stabilize a highly leveraged balance sheet. HPP market cap at the time: ~$300 million - Walker noted the equity raise was roughly double the prior market cap. HPP share dilution: Almost 2x share count / roughly tripled - Used to illustrate dilution and governance concerns.

Pivotal Quotes: "The public market at a deep discount to private market valuation." — Bill Chen: Summarizing his core strategy for finding mispriced REITs. "There is no scenario unless they go out and do some big risky deal ... these companies become trouble." — Bill Chen: On the strength of public multifamily REIT balance sheets and interest coverage. "If you're able to buy at a seven, eight, or even nine percent cap rate, that becomes a really nice little algorithm." — Bill Chen: On grocery-anchored shopping centers and their return profile.

Implications: Listeners should expect continued opportunities in public REITs where balance-sheet strength, scarce supply, and event-driven catalysts matter most. Multifamily and grocery-anchored centers look especially compelling, while office remains highly bifurcated and politically sensitive markets like NYC require extra caution.