Bill Chen on the current set up for REITs

Bill, how’s it going?

Good, good.

Go ahead.

No, go ahead.

No, I’m super excited to talk to you today. I’ve had some questions I was sending to you, so I’ve been thinking about REITs specifically and the market generally. You’re the perfect person to bounce these ideas off of, plus an interesting new investing idea.

So, Bill, let’s kick it off here. I’ve been thinking about REITs a lot. I know you’ve talked about how it’s been a really tough couple of years for REITs, and we can talk about all that. But do you mind if I start with my hypothetical? I know you know where I’m about to go.

Sure. Go ahead.

Yeah. I’ve been thinking about REITs, and I know you, my good friend Hawkins, and several other people who look at real estate a lot. A lot of the pitches will sound like this: “Hey, this company trades for—and I’m going to use a really easy number—a 5% cap rate.”

They’re an industrial REIT, and all their properties, if you look at what they’re trading for, trade at 4% cap rates, right? So if they just sold today, you’d get 25% above where they’re trading on an unlevered basis. Going from a 5% to a 4% cap rate is going from a 20× multiple to a 25× multiple, so you get 25% upside there.

Plus, all these have leverage. That’s on an enterprise basis; on a market-value basis, you might be talking about an 80% pop, 100% pop, whatever. I love that thesis.

But the issue I always come to is, that’s true, but if you don’t get that sale tomorrow, then you just buy them and get a 5% cap rate. So you get a 5% return forever, less SG&A drag. Generally, when people quote cap rates, they’re before SG&A. And if that management doesn’t sell, guess what? They’re probably going to go buy, so they’re going to buy a lot of 4% cap properties.

So I’ve had that thought in my mind. To be fair, when somebody says, “Hey, I want to go buy this company at a 10× price-to-earnings ratio, and all the peers are trading at 20×,” guess what? It’s the exact same thing if you don’t get an instant rerating. But something about the lower cap rates hits me. I threw a lot out at you there. We can talk about all of it—we can spend the next 50 minutes talking if you want. What do you think about that?

So, I think you’re missing a few things, and I think this is a common misconception about investing in real estate and REITs in general. I’m going to make one tiny adjustment: let’s just bring the cap rate up to 6%, because generally, even in large caps, we’re finding a lot of 6% to 7% cap rates.

Completely okay. I only used 5% and 4% because it made the math really easy as I was laying it out.

Yes. Let’s walk through that. If you buy the multifamily—and let’s just use the mid-6s, but let’s call it 6%—and you look at the SG&A burden of being a publicly traded company, it’s 40 to 50 basis points. When you buy them at a large enough scale, they run fairly efficiently. So let’s say you bring it down to 5.5%, and then let’s say you assume $1,000 a door for maintenance capex, which, based on tons of conversations I’ve had over the years with private GPs who manage multifamily, is a pretty good rule of thumb. That generally brings you down to about a 5.1% to 5.2% kind of true free cash flow without the use of any leverage.

I think what you’re missing is a rent-growth component. The whole reason why people own real estate and REITs in general is this adage that, over a long time period, it at least keeps up with inflation or beats inflation.

If you model a 3% annual rent increase for an asset class like warehouse, self-storage, or multifamily—or, if you want to be ultra-conservative, use 2% and insert a CPI number—you take a 5.1% and tack on another 2% to 3%. This is before any use of leverage.

The leverage of public REITs is generally about 20% loan-to-value. They’re very conservatively levered. There are other REITs out there that are 40% or 50% loan-to-value. If you model that out—I’ve done a ton of this math—even with 20% loan-to-value, a 3% rent increase gets you to an 8%. That 20% leverage will kind of get you over 10%. If you hold these assets in perpetuity, you get about a 10% total return. That’s generally what I think will happen.

A lot of multifamily REITs today are actually mid-sixes. So if you start at mid-6%, knock off 80 or 90 basis points, and add on 3% rent growth, if you hold it to perpetuity, you actually start approaching that mid-10% to 11% total return.

Can I go ahead?

Go ahead, please.

No, no, no, finish.

No, I think that—and this is, you know, if you were to buy low-leverage public REITs, if you were to put the kind of 50% to 70% loan-to-value that a private real estate investor will put on it, then your total return on a kind of permanent hold actually goes up significantly.

Let me just ask one question to start there. The math you did was kind of, “Hey, let’s just start with a flat 6%, 90 basis points off for management.” And I even forgot, when I was saying the cap rate doesn’t include your maintenance capex to maintain these properties. That brings you down to just over 5%.

Then add 2% to 3% for rent growth. That takes you to 7% to 8%. The leverage component—can you just walk me through the bridge? Because if I’ve got 8% on the whole EV stack and then I throw a 20% LTV on it, it seems kind of aggressive to take it from 8% to 10% there.

If you divide it by 0.8, it kind of gets you to that right ballpark.

But debt has an expense, right? It’s not like you’re going to—

Well, that’s the beauty of it, right? Because you’re buying it at a 6% cap. Your cash flow is leverage-neutral, right? So the debt expense is leverage-neutral, but your rent growth over time—

Okay. So you’re assuming that’s what I drive to.

So you’re assuming, basically, you’re borrowing at your cap rate effectively, and then all the rent growth on that 20% goes—okay, perfect.

Yeah, I mean, I could look at Interactive Brokers.

No, it’s all Excel right now. That’s fine.

No, not Excel. But I do want to just see—I think at Interactive Brokers, you borrow at low- to mid-4% right now, because it’s just a tiny spread over SOFR.

Oh, well, you’re talking about margin lending, which I’m just going to refer everybody to—all the investing disclosures, legal disclaimers, and all that type of stuff. But there is a difference, as many of us have learned painfully over the years in our PAs.

So let’s go back to company financing. Companies are issuing 7- to 10-year fixed-rate debt at below 5%. This is when the 10-year is around a similar interest rate as it is today. So they are borrowing at below their true free cash flow on a levered basis.

Okay, there’s a lot to talk about there. Let me start with the first one. I want to come back to this 8% to 10% all-in number that we just discussed, but let me ask a different question. If I rewind the past 2 to 3 years for REITs, as you talked about, it’s been a tough time for REITs, right? They’re annualizing way below that number we talked about. They’re annualizing below the cap rate. I mean, they’re basically annualizing at cash rates.

If I said, “Hey, the REIT indices over the past 2 to 3 years have been flat,” I’d be a little conservative, but I wouldn’t be too far off. Stock markets have been booming, the economy is doing pretty well, interest rates are stabilizing, and inflation is coming down. It seems to me like this should have been a pretty good time for REITs. Why has that algorithm not worked over the past 2 to 3 years?

I think it’s important to give the exact number. NAREIT—we just calculated this—the total return for NAREIT in the past 2 years was 7.3%, which means that, if you adjust for the dividend yield, it’s either flat or slightly negative from a price perspective.

But that’s a big adjustment, right? The dividend is a real thing.

No, when you buy REITs, dividends are absolutely a real thing. But 7.3% over 2 years is fairly brutal. If that’s your exposure, that’s a fairly brutal benchmark.

I think it’s important because you can look at it and a lot of people say, “REITs are never going to work. Why bother with them?” Another way to look at it is that this makes for an even more exciting opportunity. If you go back to 2 years ago, when I first did the podcast, I said I think what happened was that, because of ultra-low interest rates—essentially free money in 2021—and the incredible headline rent-growth figures in all real estate asset classes, every real estate GP put a shovel in the ground. This happened across almost every single real estate asset class: multifamily, self-storage—not office—but warehouses, every single one of them.

This is classic capital-cycle theory. They put all that capacity in the ground, and the deliveries hit in 2024 and 2025. We’re now really starting to get to the back end of that. You could see that because demand is a little bit harder to forecast, but there’s a lot of really good industry data on supply. You can see the supply.

What you had in 2024 and 2025 was very muted rent growth. Let’s go back to the algorithm we just walked through: How do you actually generate returns from real estate and REITs in general? You have the yield, and then you have rent growth. Most real estate asset classes have exhibited very little rent growth. This is true for self-storage, and it’s true for multifamily.

With multifamily, the coastal markets were hit worse by COVID. Coastal markets have had better rent recovery, while a lot of Sun Belt markets had a lot of rent growth, and then there’s a ton of supply. In all of this, there’s also a very interesting capital-cycle theory.

When we first did the podcast 2 years ago, I was excited. I would say I’m more excited today because there’s been very minimal cap-rate contraction or multiple expansion. There’s been very little of it. All the returns have essentially been through dividends, and the REIT stock price has been similar to what it was 2 years ago.

But now you have the supply wave that was being delivered. If you go listen to a lot of the earnings calls—whether it’s multifamily, self-storage, or warehouses—what you’re hearing from the management teams is that the supply wave is getting absorbed, and now they’re all trending below 20-year averages in essentially every single asset class. The only real estate asset class getting capital injections and new-start activity today is data centers.

I was about to say, AI data centers feel like a lot of money is going in.

The only things getting built today are AI data centers and anything infrastructure-related, because that’s coming from a different funding source.

Can I pause you on the capital-cycle theory? I think you read some of the stuff I put out and some of my podcast material. What I like about the capital-cycle framework, and what you just explained, is that I asked why this 8% to 10% algorithm didn’t work. You said that, at the start, 2 or 3 years ago, the starting point looked good on a cap-rate basis, but here’s why it didn’t work: There was a capital cycle dynamic—something outside of what you could see just by reading the financial statements. You could read industry sources, think it through, and look at the supply.

There’s a counterargument that maybe demand just kept increasing and massively exceeded supply. But I like how you did the on-the-ground research and incorporated the capital-cycle dynamics. I like anytime you can combine capital-cycle dynamics with why something did or didn’t work.

I also like what you’re saying about how you still get the same starting valuation. Honestly, if every miss I had was slightly positive after tax for 2 years, I’d tell you I’ve had a lot of misses that were a lot worse than that. I like the combination: You still get all of that, and now the supply has dried up. So please continue.

Yeah. I think Andrew, you and I both invest in companies outside of real estate—tech, chemicals, and so on. Think about when you invest in a chemical company and say, “I think 1 year out or 2 years out, EBITDA is going to be X.” How many times are we within plus or minus 3% of that projection 1 to 2 years out? I’d like to be plus or minus 30% one of these times.

Yeah. In multifamily, when I go back and look at it—particularly multifamily—basically all the NOI numbers we forecast 2 years ago were within 2% or 3% of the range in either direction. That’s why, particularly with multifamily and real estate, it’s probably a little bit closer to a bond than it is to an equity.

I was thinking in my head: It’s capital cycles for beginners. As you said, in chemicals, the capital cycle can make next year’s EBITDA literally minus 200% or plus 1,000%, whereas with REITs—

Third-tier office in third-tier cities is pretty tough right now. But outside of that, with a stabilized apartment building, it’s pretty good. Yes, it might be plus 10% 2 years from now; it might be plus 2%; it might be minus 2%. It’s not going to be negative 30%, and it’s not going to be plus 50%.

You get that capital-cycle bullwhip for beginners. My 2-year-old is doing the bullwhip, so it’s barely moving up and down, but it is moving.

Yeah.

And keep in mind that, in multifamily, this is the most delivery we’ve had in something like 40 years. If you have the most new capacity addition in an asset class, and the net result is NOI down—I don’t know—3% over a 2-year cycle, when you get the most delivery in history, I think you’re doing okay.

I also think there’s a corporate-governance angle. Anyone who’s looked at REITs knows REITs are really hard to do activism in. Corporate governance is really tough—not impossible, and we’ve seen some. But I think the other thing people might push back on would be to say, “Hey, if this company is trading for a 6 cap, and there are lots of properties at 5 caps, right? Lots of—” That is an argument for, “Hey, we should just go right now and hit the bid on everything.”

And I understand that companies can't buy or sell every day based on the stock price, but there is something where, for 2 years, a lot of these companies have traded at public-market discounts. You and I have talked about several. We've seen that when they sell themselves, they go for 50% premiums, right?

So I think the other thing people would push on is, hey, shouldn't these be getting corporate-governance discounts? As you and I have discussed on previous pods and offline, management teams often don't own a lot of stock. They get paid pretty well, and the boards definitely don't own a lot of stock. So, yes, you and I can say, "Hey, all these trade at 6% cap rates, and they should trade at 5% cap rates." But the board and management are never going to realize that. Actually, they're going to take a lot of your money and invest it into the 5% cap rates. So shouldn't we get some type of corporate-governance discount?

Well, I mean, REIT discounts and REIT premiums are kind of—

Yeah, we've certainly talked about that.

Yeah, we certainly talk about that. But I want to reiterate: if you're a scaled REIT—meaning you're above $5 billion—it takes a long time to grow to that size. It takes a long time to do a lot of development—a lot. Give me a publicly traded REIT with an ATM program, and I might surprise you with how quickly I could grow it to $5 billion, Bill.

Well, no, I think it's worth saying that it's a disservice to the investment community if every time a REIT trades cheaply—a $5 billion or $10 billion REIT—management just instantaneously liquidates itself or gets sold to private equity. Candidly, we could disagree.

No, no, I don't disagree. If the stock trades from $20 to $18, it would be kind of silly if the management team instantly said, "Strategic alternatives—we need to sell." That seems a little silly. But I do see a lot of them where the stock trades at $15, several people say, "Hey, NAV is $22 or $24," and management doesn't care.

But they do. But, Andrew, they do care. If you look at Camden, Camden is selling its worst, older-vintage, lower-quality assets to buy back shares. The way they're financing it is that they bought back $50 million in a quarter. For AvalonBay, I'm waiting for Q4. In Q3, they sold some older assets and bought back $50 million. For AvalonBay, I believe the number is $150 million.

A lot of these larger REITs—the larger blue-chip REITs—are doing the right thing from a capital-allocation perspective. At the margin, that incremental dollar is going toward either a brand-new development at a 6% cap rate, which I think is actually a pretty good use because you get a brand-new building, or toward buying back shares. So I'm okay with a lot of these larger REITs not selling themselves but, at the margin, buying back shares.

Well, you know Camden much better than I do. As you said that, I just pulled up the 10-Q, but I'll push back. If I look at net cash from operating activities, it's $630 million in the first 9 months of 2025. They do $50 million of buybacks, $310 million of development and capital improvements, and $334 million of acquisitions of operating properties, which is about half offset by net proceeds from sales of operating properties.

I'm not saying they're not buying any shares back. They bought $50 million, but this is an $11.5 billion company. Fine, they'll do $65 million for the whole year if they keep that pace. It's not nothing, but the incremental dollar is clearly still going to development. I don't know what the acquisition was, but it's still clearly going to growth. If you're saying they're trading at a 6% cap rate and deserve a 5% cap rate, it seems to me that the incremental dollar should be going to share repurchases.

Well, I think this is where we could talk all day about this. I think—

We've got an hour-long podcast. That's what we're doing, baby.

Well, I think it's important that there is a fiduciary duty for these management teams to keep the average age of these properties low, or not let it grow too much over time. You manage a portfolio; you don't want it to constantly get older every year.

Why is that a fiduciary duty?

What's that? Why is that a fiduciary duty?

I think if you do nothing and just sit on your butt and don't recycle capital, every single year the assets get older.

True. But let me take it to the extreme. If the stock traded for $1—forget the per-share price; if the company traded for $1—clearly the incremental dollars shouldn't go there. Shouldn't the company always be looking—I'm not saying let the buildings fall apart—at maintaining a baseline level of maintenance capex? That's not making the buildings younger; it's just a baseline level of maintenance capex. We can't be slumlords and let these buildings fall apart, but after that, shouldn't every dollar be directed toward buybacks?

Why does having buildings that are 8 years old versus 10 years old matter? If our stock is cheap enough, shouldn't we say, "Let's let our buildings age by a year this year, and we'll buy back even more shares"? These buildings can trade below replacement value. Yes, they're depreciable assets and they will run out, but if the stock trades low enough, shouldn't you say, "We can't go replace these buildings. We just need to buy them on the stock market"?

It's the same way I've argued with a lot of pharmaceutical companies. They're like, "What do you want us to do, cut the science to buy back shares?" Unfortunately, the answer is yes. All of your key drugs failed. You raised $500 million to find the cure for cancer, and your stock trades for $250 million. You can't go buy drugs and run this business. The market and the economics are screaming that you need to liquidate this. I'm not saying all of them need to liquidate, but isn't there an incremental argument there?

I understand the buyback argument, and I agree that the buyback can be a higher and better use of capital. But I've also invested in enough REITs where there's been very minimal buying back. I'll tell you a hilarious story about share buybacks.

All of them will be hilarious if it was Liberty Investor Day.

This was like 2019, before COVID. I ran into Mario Gabelli. Mario had a stake in a company called Griffin.

Which was a real sum-of-the-parts land story.

Mario had publicly written a letter pressing them to buy back shares. I had just gotten out of FRP for the first time after Blackstone bought it, and I thought, "Here's another warehouse company trading at a huge discount." It had a complex sum-of-the-parts story. It had this land bank up in Connecticut, and they were doing a really good job selling land in Hartford and using 1031 exchanges to buy land in the Lehigh Valley and develop it.

The CEO was excellent. His name is Michael Ganza, and we still talk today. Griffin was taken private, right? I ran into Mario, and I asked him what he thought. Mario just wanted them to buy back more shares.

If they had bought back more shares when Mario was pushing them to, they would have wound up more heavily weighted in land in Hartford, Connecticut, and office in Hartford, Connecticut, and that entire portfolio would never have evolved. Instead, Michael Gibson sold the land, used 1031 exchanges to move into the Lehigh Valley, and built an incredible modern portfolio. He was getting about a 7% unlevered return, and then rents doubled over time. He picked great markets and built great assets. Then he expanded to Charlotte and other markets.

The point I'm making is that, within a few years, nobody cared. Nobody cared. I was telling people Michael was a great operator and was doing the right thing by recycling capital, while Mario was publicly pushing him to buy back shares. Fast-forward to today: they got bought out by Senue and the government of Singapore for double my cost basis, 3 or 4 years later. In the private market, they've also probably doubled their portfolio.

What was a $250 million enterprise-value company is now probably a $1 billion to $1.5 billion company. All I know is that they had 15 million square feet when they had maybe under 2 million square feet. What I'm saying is that not every solution to an undervalued stock is some form of share buyback. I do hear you, but—

Isn't the thing that jumps out to me that it was the CEO, this brilliant CEO, who made this great move? He was so good that he could sell the assets and, instead of buying undervalued stock, go do this great thing. That's awesome, but—

Andrew, I'm going to stop you there.

I'm going to stop you there. I'll tell you what: there are messages on the investment forums where, instead of saying, “Oh, this is a brilliant CEO. He's doing this,” every value investor was pushing back on me at the time, saying, “Well, the guy's father-in-law is on the board.” SG&A is $7 million because they're doing a lot of development. They're doing a lot of heavy lifting with this transformation.

Every value investor was basically saying, “Why are they not buying back shares?” There were trading-liquidity concerns. There was the sense that they had an opportunity to do really well, but all the really good stuff they were doing in terms of recycling capital was only apparent when they got a new chairman by the name of Gordon DuGan.

Then the stock popped 20% in 1 day, and all of a sudden Michael Gamzon is a really good CEO. Michael Gamon wasn't any less of a CEO before Gordon DuGan joined the board, right?

So what I'm saying is that I think the share buyback makes a ton of sense, and the fact that they're not doing it doesn't mean that you're not going to generate a good return on these equities. I think the tides will turn the other way one day, and people will want to own these assets. When they want to own them, how many times—if you look at silver, or whatever it may be—it's flat, flat, flat. I mean, how—

No, it's funny you're saying it, because I was thinking the other day: for as long as I've been doing this podcast, everyone's been saying, “Gold, whatever.” Yes, if you have a pandemic or pandemonium, it does well, but that's it. And the people who've just been hardcore bulls for years, everything's got to say—

Let me go to a completely different one because I want to get to Alexandria, but I want to get 1 more question here.

Yeah, but before you go on, I just want to say that we've been so hyperfocused on the large cap, right? Let's go through the list. We're not just in large caps, right? We're in a lot of these small caps. Let me just walk through a list of names that have been taken out, both in our portfolio and also that I'm aware of.

You've got Inco that's liquidating; you've got Elme Communities that's liquidating; you've got ROIC, bought by Blackstone, that's in our portfolio; you've got Alexander & Baldwin, bought by Blackstone, that's in our portfolio; Dream Residential, which was a portfolio name of ours; hotel and resort, which our friend Travis also owned, as mentioned. So there's—

Did you see what Hyatt did with Playa?

I know that they bought it, and then they sold the real estate. If you look at the implied value of what they created—the management-fee stream, the OpCo, because if you have a hotel, there's the hotel, which is the real estate, and then there's the OpCo, which is actually operating the hotel—if you look at the implied value of what they created in the OpCo, they got quite the price on Playa.

Yeah. No, I mean, I think any private equity that buys or takes a REIT private—one of the observations I made is that we're in an environment where the public-equity investors could get a 40% bump on a takeout. Say, I don't know, a 25% to 40% bump on a takeout. I think the bar for PE to make money buying public REITs today is so low; it's a really easy game for them.

That was my argument, right? The bar is so low; all should be hitting the bid.

Yeah. I mean, there was a part of me, when I was really happy to hear the news of Alexander & Baldwin getting taken private. That was a 5% portfolio day for us, right? But when I looked at the valuation, there was a part of me that immediately thought, “I may want to go activist on this,” right?

But because I know what Blackstone is going to do on that acquisition, they're going to do really well on it. The only reason I didn't try to make more noise about it is that there are so many other things I could just buy right now and rotate that capital. It's such a target-rich environment that I just keep recycling my capital today.

The history of going activist on deals at nice premiums, unless the deal is crazy conflicted—I would say the history of going activist on well-negotiated deals, even if you can disagree and say, “Hey, I thought this was worth $20 and it was worth $18,” but if it was shopped well and thought through, the go-shop does clear some of it, though there can be issues with it. But the issue with going activist is you really don't want to break a deal. The bird in the hand versus 2 in the bush.

Okay, last question, then we're going to Alexandria.

Lots of different sectors within REITs: industrials, hotels, apartments, office buildings, New York City office buildings. Where are you seeing the most dislocation right now?

Blindly, without adjusting for leverage, I would say probably life science and cold storage are the 2 areas where there's the most amount of dislocation, because you've got Lineage, Americold, and Alexandria—large, large blue-chip REITs—trading at fairly high implied cap rates and fairly low EV-to-EBITDA multiples, right? So I think that's an area where, regardless of the inherent leverage in the company, there's a lot of dislocation.

Outside of that, I would say the way to think about it is that anything that's got 40% to 50% loan-to-value, you're generally going to find a little bit more dislocation. But I think that's a factor of leverage.

I would also say that self-storage is very, very dislocated right now. After Q3 earnings last year, for whatever reason, they all sold off in groups. Then early this year, they kind of found a little bit of a bid. People think that the supply-and-demand dynamic is inflecting, and we love our self-storage exposure right now.

I think a lot of liquidations and a lot of event-driven situations—not on an absolute basis, but on a risk-adjusted basis—are very, very dislocated right now.

Let's call them hiccups recently.

And I have noticed all of them have traded off on the hiccups of one and then another. I've been wondering if it's like, “Hey, there are 10 guys who care,” and the 10 guys all have the same position. When 1 of them has an issue, 1 of the guys says, “I'm just out of all of them.” There's just no natural buyers.

I'm always kind of interested when, like biotech—real estate is another—in general, the issues at 1 company should not bleed over to the issues at another company. They can be related, but if 1 company's Miami real estate and another company's San Francisco self-storage, those are very different things. But you do see, “Hey, the Miami real estate thing disappointed, so the San Francisco self-storage thing is trading down too.” I've definitely seen that. You can tell me if I'm wrong or tell me otherwise, but it's pretty interesting right now.

I think that generally, what we've done—what we've made adjustments to in our portfolio—and this is not investment advice, but in a professionally managed portfolio, I've personally historically run under 100% gross exposure. This is the first time that we ran over 100% gross exposure, call it between 110% and 130%.

Here's the reason why: I can run the gross exposure from 100% to 130% on a lot of these event-driven liquidations. They're literally like, you buy something for $10, and based on the asset sale and the cash on the balance sheet, you're getting half of that back within 1 to 5 months.

I can run that. I'm not afraid to run that because I know that 130% gross exposure could very quickly drop to 120%, 115%, and then 110%. I also have recurring dividends coming in.

No, I'll refer everyone to the legal disclaimer for everything about the gross, but I do hear you. It's one of the tough things, right? A lot of these liquidations declare, “Hey, the stock's at $20,” and they say, “Hey, we're giving $15 back.” They declare the dividend, so now they're legally obligated to pay the dividend. They're paying it in 2 months.

You're like, “Hey, how do I think about this position? If I think ultimately this is going for $25, how do I think about this position? And how do I think about my sizing in relation?” Because if you were running under 100%, then cool, you can just keep it. But if you were 100% invested, it's like, “Hey, if it's at $20, is this a 10% position? Or if the $15 is coming back, should I think about it as a 2.5% position?” If I'm doing that, I'm way under it. It keeps me up at night, though.

I think the answer is that's actually a 2.5% position, but it keeps me up at night.

You and I are thinking about something very similar. I think that’s because we’ve got one or two and a half.

I just go back to when Buffett was running his partnership successfully. What he was targeting was a lot of these event-driven liquidations. John S was a third, but he was also running over 100% gross, and he was using a little bit of leverage.

The wrong way to do these liquidations is to do the New York REIT liquidation from years ago. Every hedge fund was in those trades, and today there are maybe a dozen people like you and me tracking these. They’re not that large and liquid. It’s not like a $10 billion liquidation where all the big funds are there. There’s a certain amount of illiquidity to some of these names.

This is a net-lease office property, right? I’ll disclose that Bill is basically talking about my portfolio right now.

Well, since we’ve talked about a few—and we don’t have to talk about specific ones—there are 5 liquidations out there in real estate, and you’ve hit 2 of them. As I said, a lot of these have had disappointing numbers, right?

And look, price is everything. You can adjust the price. But when I look at these, a lot of them have had disappointing numbers, and for some of them, I think and hope that has presented an opportunity for me. When you look at these and see the disappointing numbers, a famous thing with liquidations was, “Hey, a company comes out and says, ‘We’d like to liquidate. We think we can give our shareholders $20 to $21 back per share.’”

The famous thing with liquidations was, “Hey, that $20 low end is so heavily lawyered up. It’s so contingent. Come hell or high water, they’re probably going to hit the $20 per share, right?” Now we’ve seen a few liquidations where they’ve said, “Hey, we’re going to do $20,” and then they come out and say, “Actually, when we started putting the properties on the market and getting some bids, it seems like we’re going to do $19.50 on the low end.”

So, are you reading anything into that? I think the only thing I would read into it, Andrew, is that it’s really important for us to have a clear benchmark. If we get in, we need to see a MOIC—at least an equity multiple reflecting 20% upside. We’ll generally try to underwrite to 20% upside. If we put up that capital and don’t see at least 20% upside, our general thinking is that if we underwrite to 20% upside and get some disappointment, exactly what you said—$20 becomes $19.50—that 2.5% or 3% disappointment cuts that back down from 1.22 to 1.15 or 1.17. That’s how we’re trying to control it.

From a market perspective, particularly if we’re talking about net-lease office properties, I think there is some truth to that. The assets with longer lease terms and assets that are easier to underwrite were sold early on. What you have left are office assets with very short-term lease terms and likely lower quality. The stuff that’s good for redevelopment as multifamily has been picked over. So I think there is some truth that, in a liquidation, the easier-to-value, better assets get picked over, and toward the end you get stuck with a little bit.

And again, I’ll disclose that I’ve got a position in one where I also wonder if you run into the issues with liquidations where it happens a lot. The management team, I don’t think they had much incentive, and I don’t think they cared that much about value maximization, because I look at some of the prices of the properties they sold and I think everything you’re saying is correct: this is a low-quality property.

But they’ve sold a few properties where I look at them and think, “Hey, it had 8 years left on the lease, and you sold it.” I’m just going to pull out a number: $10 million per year, so $80 million of rent remaining. Obviously, there are some expenses and some time discounting, but you sold that property for $80 million. So you basically said there was no terminal value left after the lease.

I wonder if it’s a case where, if you and I had been in there, had a 15% position in the equity, and were in charge of the sale, we would have said, “Absolutely not. If you want to pay us $80 million, we’re going to hold this thing, manage it, and sell it for scraps at the end. But you’ve got to pay us $85 million or $90 million, something on top.” I wonder if you have a management team that doesn’t own anything and is getting a very small management fee in W. P. Carey. I wonder if they were just like, “Forget it. The first bid that seems reasonable—take it. Don’t negotiate.” I do wonder if part of that has happened there.

I mean, Andrew was smiling a little bit, right? Because there’s the counterexample of the New York REIT liquidation. They decided to hold on to One Worldwide Plaza, and, lo and behold, they said, “We’ll do the value-add.” They partnered with SL Green, and, lo and behold, they put that into a non-traded stub, and it doesn’t trade.

Guess what? They waited a few years, COVID happened, and they were going to spruce up the lobby. They were going to do some value-adds to try to extract more value from it. I think the equity was totally wiped out on that, right?

I think there is some truth to what you said, and it makes a lot of sense. But shareholders also criticize management teams for moving too slowly, and they made a decision: they’re going to move fast and sell these assets.

Yeah, I think there is some under-monetization of assets. I do think so. We talked to some bidders—some bidders who won some of these auctions. When you look at a lot of these assets, you’re like, “Oh, that price looks low, right?” But if you actually talk to people, you’re like, “Oh, that had asbestos in it,” or, “It’s hard to…”

I know one that sold for $1 million less than I thought because there was an asbestos liability. Absolutely.

We’re like, “Oh, there’s one asset that sold, right? That price kind of seems low.” There’s a weird quirk in there where the tenant could back out of the lease, even though there are 5 years left on it. The tenant could have this really weird clause where they could potentially back out of a portion of it. If you’re a buyer, you really have to have a strong conviction that they’re not going to. I think it eliminates a certain number of bidders.

So, out of all that, answering the question: not that.

No, that was great. Let me ask you another one that I’ve been thinking about a little bit. There are 2 names I’m thinking about in particular; if you say them, I’ll give disclosures. As I said at the beginning, the rule of thumb in liquidations has been that they come out with the low end, right? The low end is like, “An asteroid hits the Earth. It turns out our chief legal officer stole $50,000 from us.” All this sort of stuff—that’s the low end. Every contingency is baked in there.

We’ve seen a few that have come in low, and I’ve wondered about this. When some of these have had to adjust down, I’ve seen a lot of people say, “This is why you want to be crazy conservative in the liquidation, because you’re going to get hit with shareholder lawsuits if you come in low.”

My 2 questions are: Do you think these companies actually weren’t being conservative when they gave these numbers, or do you think they just came out into worse environments? The second question, which I have some thoughts on, is that everybody says, “You go conservative because there’s no incentive to go aggressive. You get sued if you go aggressive.” Has anybody actually ever been sued for saying, “Hey, we think we’re going to do $20 in liquidation,” and then they come in at $19.70? Anyone can file, but has anyone ever actually had to pay out on that?

I don’t remember anyone having to pay out on that. Also, keep in mind, Andrew, I think there’s a big difference between saying your low end is $20 and winding up revising it down to $19.50. If you come out and say the low end is $20 and now you’re revising it down to $17, I think you’re a lot more likely to get sued. The magnitude of the revision matters a lot.

You’re right, though. If you come out and say, “We’re liquidating, we have $20, and we’re declaring a $15-per-share dividend right now. The stub is $5,” and you take that from $20 to $19.50 on the stub, you actually did a big—

So, just one more thing, but I do completely agree with you.

Yeah. No, I think it’s really interesting because, Andrew, you and I have been investing for a decade. When was the last time you could recall this many liquidations within 1 sector?

No. Well, come on over to the [laughter] biotech world, Bill.

No, I’m saying over there.

Yeah. Obviously, biotech has a ton of liquidation, right? But I don’t remember having 5 REITs simultaneously be in liquidation.

And look, I think it’s an interesting counterexample to you and I at the start. My pushback on the 6-to-5—one of them was, I kept saying, “Corporate governance, corporate governance, corporate governance.” And I do think this is interesting: You’ve had multiple ones liquidate now. Were some of them under pressure from activists? Probably, in hindsight. Do I think these liquidations are probably inefficient versus the “Bill, just sell the whole portfolio to Blackstone” route?

Also, probably. But I do think it’s interesting. You’ve had 5, and a lot of what you said earlier was, hey, these $5 billion-plus-scale market-cap REITs—and those aren’t actually the ones I really have issues with. It is these: Hey, we’re a $700 million market-cap REIT with a billion of EV. Well, cool. You’re spending $20 million bucks a year to be public. How are you going to outrun that drag and create value? I think the answer is no. And if they’re all liquidating, I think it’s just very interesting to me.

Yeah. No, this is—I mean, I keep saying that this is the most interesting REIT environment, and this was a great example of that, right? 5 liquidations simultaneously, and I will trade them. So, we’ve been very, very tactical. We’ve been in and out. I was up on Christmas Eve, trading AMCO because they closed a deal, right? That was midday; the news came out. It’s a very interesting space, and I haven’t been this active in event-driven situations within the REIT space in a really long time.

Man, Bill, I’ve got so much to talk to you about, but I actually have a hard stop here. So we’re going to have to wrap it up. Here are the 2 issues. A, I have a natural next question, and we’re just going to have to stop for the hard stop. And B, I’ve got 14 questions I have written on Alexandria’s Group that we’re never going to be able to hit. So, maybe we’ll schedule a quick follow-up appointment, and we’ll both wear Yet Another Value Podcast.

Well, and I do—do you want to do this? I mean, if we’ve got, like, 3 more minutes before the hard stop, right?

It’s a right-now hard stop. It’s like a 30-second hard stop. But I love having you on. This was a really fun conversation. We can keep this going in the very near future, either offline or on the podcast. So, Bill Chen, it’s been awesome. You might be on the Mount Rushmore if we had another Yet Another Value Podcast guest. But I really have to hop. We’ll talk to you later, buddy.

Talk to you soon. Yep.