Rhizome Partner's Bill Chen's post-NAREIT takeaways
Bill Chen’s central post-NAREIT takeaway is that blue-chip public REITs are entering the next cycle with balance sheets private owners cannot match. The management teams he met reported no distress, interest coverage generally ran 3-8x—7.2x at Mid-America and 6.8x at Camden—and seven-year unsecured debt was available around 4.9% to the high-5% range. Private-market new-debt underwriting, by contrast, often starts at 1.25x debt-service coverage.
A 70-80% collapse in market-rate multifamily starts is setting up a supply-light window through at least 2028-29. Affordable and mission-driven projects may still proceed, while AI data centers are a separate category; Bill thinks rent growth could run at least 3% in 2026-28 if market-rate supply remains constrained. Public REITs can fund development from diversified, roughly 95%-occupied portfolios while private owners have their “hands tied behind their backs.”
Bill still underwrites roughly 18% three-year and 15% four-year IRRs for Mid-America and Camden without heroic assumptions. His model uses 3-4% rent growth and a 5% exit cap rate, while Andrew’s pushback is that a new property trading at a 5% cap does not prove an older portfolio deserves the same mark. Bill’s rebuttal: scale, liquidity, diversification and acquisition optionality arguably warrant a “liquidity premium,” not today’s public-market discount.
New York residential fundamentals are unusually strong precisely because regulation and physical constraints suppress new construction. Bill separated that operating strength from political risk: proposals for indefinite rent freezes or price controls could damage affordable-housing providers, as Washington, D.C.’s eviction restrictions illustrated, yet they might also increase the scarcity value of existing high-end, largely unregulated portfolios. “You can’t really build anything here.”
Grocery-anchored shopping centers are Bill’s next major theme after more than 15 years of underbuilding. Annual supply growth fell from roughly 3% in 1999-2008 to below 0.5% recently, while Sun Belt portfolios can combine 3% contractual escalators, 10-20% renewal lifts and roughly 20% new-lease increases into 4-4.5% NOI growth. Competing projects may require rents to double, making existing centers bought at 7-9% cap rates especially compelling.
Management quality remains the largest caveat to cheap REIT valuations. Andrew highlighted controlled structures and missed buybacks; Bill contrasted Camden’s modest $40 million repurchase with Eurofins buying roughly 5% of its shares in five months, and called Hudson Pacific’s buyback-near-$20/issuance-in-the-mid-$2s sequence “doing everything wrong.” Face-to-face meetings remain crucial because defensiveness, frustration and capital-allocation intent do not appear cleanly in filings.
Bill now sees enough dislocation to construct an entire roster rather than rely on one or two ideas. Mid-America, Camden and FRPH are the “offensive linemen”; grocery centers are running backs; Bill later identified Clipper and COPT as 2%-3% wide-receiver allocations, while also discussing a small Seaport position; and Dream Residential is special teams, with a potential sale against a stated $13.30 NAV. “In today’s environment, we could build a whole team.”
1. Public REIT balance sheets bear little resemblance to private-market distress
Across roughly a dozen NAREIT management meetings, Bill heard no company describe debt distress or difficulty covering interest. Coverage generally ranged from 3x to 8x, including 7.2x at Mid-America and 6.8x at Camden—levels that leave little plausible path to trouble absent a large, self-inflicted acquisition or development mistake.
The private-market contrast is stark: new debt underwriting may begin around 1.25x debt-service coverage, with anything above that deemed healthy. Bill has also watched private multifamily LP distributions disappear when floating-rate debt reset, while the major public apartment REITs continued funding dividends, acquisitions and development.
Public balance sheets also retain financing access. Blue-chip REITs were issuing seven-year, fixed-rate unsecured bonds from roughly 4.9% through the mid- or high-5% range, with lenders underwriting diversified, approximately 95%-occupied portfolios rather than treating the proceeds as financing for one speculative project.
Bill’s framing: these are “clearly the more structurally advantageous players”—often around 25% loan-to-value, roughly 4x net debt to EBITDA and 7x interest coverage—yet investors can still buy them below private-market asset values.
2. The construction cliff is creating a multiyear rent-growth runway
Bill’s late-2023 thesis was that already planned and budgeted projects would finish, but high rates and inadequate development returns would then cause starts to “fall off an absolute cliff.” Eighteen to 24 months later, Bill sees market-rate multifamily starts down 70-80%, with declines of at least 50% across self-storage, warehouses and most other property categories.
Affordable or mission-driven projects may still be greenlit, but conventional market-rate supply has largely stopped receiving the green light. AI data centers remain a separate category because they are “a whole different animal.”
Bill’s conditional forecast is at least roughly 3% annual rent growth in 2026, 2027 and 2028, with meaningful new supply unlikely before the second half of 2028 or 2029.
The longer rates stay high, the longer that window may remain open. Public REITs can therefore develop into scarcity while leveraged private owners remain sidelined—the precise asymmetry Bill expected when the construction pipeline was still obscuring the eventual shortage.
3. Cheap unsecured capital lets the public REITs restart development first
Mid-America and Camden can borrow against hundreds of stabilized buildings, then direct a small portion of total capitalization toward ground-up projects. Bondholders are not lending 100% against one risky development; they are lending to a large, occupied portfolio that happens to allocate perhaps 5-6% toward construction.
That structure creates a cost-of-capital arbitrage unavailable to most private developers. Bill even asked why Mid-America should stop near a $1.2 billion development pipeline instead of pushing toward $2 billion, though he acknowledged limits for a company with roughly $22-23 billion of enterprise value.
The same advantage applies to acquisitions. Management teams would buy newly built multifamily assets around a 5% cap rate, hold them for 25 years and compound from the coming rent-growth cycle; forced sellers accepting that price often lack the option to wait for a better exit.
At roughly 4x net debt to EBITDA, Mid-America could potentially add another turn of leverage—about $1.5 billion by Bill’s estimate—for acquisitions or development. The opportunity is therefore not merely defensive survival: excess balance-sheet capacity can become offensive capital allocation.
4. The 15-18% apartment-REIT return case survives Andrew’s cap-rate challenge
Bill’s base underwriting produces roughly an 18% IRR over three years or 15% over four, assuming 3-4% rent growth and a 5% exit cap. Andrew emphasized how unusual that is for liquid, dividend-paying large caps with relatively narrow operating outcomes: “That’s the stuff investors make a career on.”
Andrew’s pushback—worth keeping—is that a REIT paying a 5% cap for a brand-new building does not establish the same value for its older portfolio. Bill conceded the quality difference but argued that forced development sales are poor evidence of equilibrium pricing, especially when most private buyers are absent.
Bill’s broader claim is that large, liquid, diversified operators with superior funding and acquisition optionality should eventually trade above private value. Public REITs historically did receive that “liquidity premium”; today, investors are “not paying anything at all” for the optionality.
A postmortem on the late-2023 thesis reinforced his confidence. Buying in the stated roughly $115-$130 range generated annualized outcomes beginning just under 15% and extending above 20%; selling during the more recent $155-$170 range could have produced roughly 17-38%, depending on entry and exit.
5. New York’s political risk is also its supply barrier
At NAREIT, Bill heard broad enthusiasm for New York-area residential fundamentals from operators such as Equity Residential and AvalonBay. The attraction is simple: demand is healthy, rent growth is strong and “you can’t really build anything here.”
Regulation deepens that barrier by making development economics unusually uncertain. High-end portfolios have limited direct rent-regulated exposure—Clipper is a notable exception—so stricter rules might perversely increase incumbent asset values by preventing competing supply.
Bill nevertheless reacted sharply to proposals for indefinite rent freezes and government-backed supermarkets, drawing on his experience growing up in a communist country: “If we’re going back to another price-control environment,” the long-run consequences matter even if existing owners initially benefit.
His concrete warning came from Washington, D.C., where rules that effectively prevented eviction encouraged some tenants not to pay. Affordable and mission-driven housing providers then faced financial distress or bankruptcy—the opposite of the policy’s intent and, in Bill’s telling, a wake-up call for politicians.
6. Multifamily operations barely cracked under the supply wave
At Mid-America and Camden, the maximum NOI decline was less than 2%, while occupancy remained around the mid-95% range—roughly 95.5%. Bill credits disciplined pricing: management conceded some rent to protect occupancy rather than allowing the delivery wave to create destabilizing vacancy.
Affordability also remains healthier than coastal anecdotes imply. Rent consumes roughly 21-23% of resident income across these portfolios, a ratio Andrew contrasted with the far heavier burden faced by New York renters.
Mid-America increased its annual dividend from about $5.60 to $6.06 per share during a period when many private multifamily LPs lost distributions altogether. Cash generation continued funding dividends, purchases and developments rather than servicing a floating-rate rescue.
Bill has made multifamily roughly 50% of one hard-asset portfolio because he sees narrow downside ranges and durable demand. Unlike an operating company whose value can unexpectedly migrate to one speculative project, the underlying exposure remains hundreds of apartments across a dozen Sun Belt cities.
7. Technology strengthens scale, but AI is not yet moving resident demand
Andrew asked whether AI employment is redirecting migration toward a few technology hubs or away from them. Bill’s honest non-answer was that management teams were not reporting an identifiable AI-driven population shift, and the absolute number of AI-development jobs may be too small to move Sun Belt apartment demand.
The immediate AI and software benefits sit inside operations: automated tenant screening, paperless leasing, self-guided tours and fewer on-site leasing employees. Leak-detection systems offer another mundane but valuable example of technology that a 100,000-unit operator can spread across its portfolio.
A 300-unit private owner cannot rationally spend millions developing the same systems. Public REIT NOI margins are materially higher than those in many private deals Bill sees, although he cautioned that scale cannot be isolated cleanly from their larger, more institutional-quality assets.
Andrew pressed for a per-unit cost figure, but management teams had not quantified one. Bill added it to his next NAREIT question list rather than pretending precision: the advantage is visible, but its exact dollar contribution remains unproven.
8. Governance separates genuine compounding from merely surviving a rerating
Andrew’s recurring concern is that REITs are effectively controlled companies: activism is difficult, insider ownership can be limited and management may prize asset growth because it supports prestige and compensation. When shares trade far below NAV, failing to repurchase them can be a major per-share opportunity cost.
Bill found only modest evidence of aggressive buybacks. Camden repurchased roughly $40 million, negligible relative to its size; by comparison, Eurofins bought about 5% of its shares in five months after complaining that the stock traded near half of private value. “They just went out and bought back 5%.”
Retail Opportunity Investments Corp. supplied the better capital-allocation outcome. At the prior NAREIT, Bill read the CEO’s visible frustration with repetitive Kroger-Albertsons questions as a sign the company might sell; Blackstone called on June 19, shortly after the conference, and a full process followed.
ROIC had been a roughly 15% position and contributed about 4% to fund performance. Bill wished the sale price were higher, but the episode reinforced why he calls NAREIT “the Super Bowl for what we do”: facial expressions, defensiveness and frustration can reveal what transcripts cannot.
9. AI accelerates preparation, while human meetings preserve the edge
Bill’s firm has built internal AI tools that systematically pull developments from earnings calls and prepare outlines before meetings. Bill expects such capabilities to become commonplace within 12-24 months, so the current informational advantage will decay.
His advice to younger investors is therefore to combine those tools with repeated management contact. Comparing a team’s answers and body language over two or three years can reveal whether a thesis is progressing—or whether a CEO becomes unexpectedly defensive when asked a simple question.
Andrew agreed from his own company calls: a press release may sound ambiguous until management either explains an alarming expansion plan or plainly reiterates that capital will be returned, perhaps because an 85-year-old chairman has estate-planning needs.
The shared conclusion was not that meetings produce forbidden information, but that they clarify intention and temperament. That remains one way to “AI proof” investment work after everyone can summarize the same filings.
10. Grocery-anchored centers combine scarce land with embedded rent resets
The market still carries an “over-retailed America” narrative rooted in the 1999-2008 period, when shopping-center supply grew around 3% annually. After the financial crisis that fell near 0.75%, and during the last four or five years it dropped below 0.5%.
Bill distinguishes grocery-anchored strips from troubled B/C malls and power centers. A supermarket surrounded by Chinese takeout, pizza, Pilates, urgent care, physical therapy or radiology offers enduring convenience: “You pull up, you park, you go in.”
In infill Sun Belt locations, a competing center may require 10-15 acres at a busy intersection. Operators told Bill that rents would need to be roughly double current tenant rents before a competing center worked, while population has continued growing around the existing stock.
Lease economics carry their own delayed mark-to-market. Portfolios often have 3% annual escalators, 10-20% renewal increases and roughly 20% increases on new leases; together with mid-90% occupancy, that supports 4-4.5% annual NOI growth on assets sometimes purchasable at 7-9% cap rates.
11. Blackstone’s ROIC purchase validates the theme, but the best names remain undisclosed
Blackstone bought ROIC at roughly a 6.1% cap rate, gaining a 97%-occupied West Coast portfolio that private-market participants described as almost impossible to assemble. If NOI grows around 4% and financing costs sit around 5-6%, Bill thinks “that math just works really well.”
Bill said there had been only three deals in the grocery-shopping-center space over the preceding two or three years, including ROIC’s sale, a Kimco stock-for-stock transaction and Urstadt Biddle Properties. He would welcome consolidation where duplicate G&A disappears and two smaller companies become large and liquid enough for bigger REIT funds to own.
He floated a hypothetical 40-50% stock premium only where the acquirer’s shares were also cheap, allowing investors to roll into a better-scaled platform. Andrew laughed at the casual wish list, but the underlying logic was scale, liquidity and eliminated overhead rather than cashing out indiscriminately.
Bill’s firm was still building positions and withheld the names: one grocery-center idea underwrote to a mid-30% three-year IRR, with either a sale or removal of an overhang as the catalyst; others modeled in the mid-20% range. Bill wanted to surface the asset-class mechanism without front-running unfinished work.
12. The roster pairs stable compounders with smaller, event-driven torque
Bill’s football construction puts Mid-America, Camden and FRPH on the offensive line: large, durable holdings designed to anchor the portfolio. Grocery-center ideas are running backs capable of mid-20% to mid-30% outcomes; he later described Clipper and COPT as 2-3% “wide receiver” positions with more volatility and torque, while discussing Seaport as a separate small position that might be viewed as a running back.
Clipper has been frustrating because of New York rent stabilization, but management maintained the dividend and avoided meaningful dilution. If rates ease and investors re-engage, Bill thinks the retained per-share upside could support an $8-$10 stock—quite different from rescuing a company by multiplying its share count.
Seaport’s assets may be valuable and its cash was roughly $18 per share, yet Andrew learned that neither figure creates a hard floor for a small, controlled, cash-burning company. Progress on the Meow Wolf lease and 250 Water Street matters, but the new CEO must drive enough traffic to create restaurant and event operating leverage.
The separation of the MPC assets from Seaport was strategically sound in Bill’s view: Ward Village, The Woodlands and the Summerlin assets fit one operating box, while Seaport requires a focused turnaround. More concerts, events and foot traffic are the mechanism; asset value alone is insufficient.
13. Office recovery is class-specific, and Hudson Pacific shows the cost of bad timing
Bill believes New York has moved past the “office is dead” narrative for well-located Class A buildings, not for B/C properties. Alexander’s became a 12% position because its Bloomberg global headquarters has a lease through 2040 and a tenant whose credit and headquarters commitment make the asset unusually defensible.
Bill also bought Vornado preferred shares near $0.45 on the dollar at roughly an 11.5% yield after another investor correctly called the common-stock bottom. Outside trophy assets, B/C offices can still transact if long leases and strong tenants let buyers DCF the remaining cash flows and assign a conservative residual.
Hudson Pacific raised about $600 million of equity while its stock traded in the mid-$2s, eliminating much near-term bankruptcy risk but increasing the share count by more than 150%. Andrew’s illustrative NAV fell from roughly $10 to $4.50 per share after dilution: the call option lived longer, but each share owned far less upside.
Bill’s governance verdict was severe but hedged: buying shares near $20, investing in studios and issuing heavily in the mid-$2s looked “likely to just preserve your job.” AI-generated video adds another uncertainty to the studio thesis, even if San Francisco office fundamentals eventually recover.
14. Dream Residential offers a bounded catalyst that broad REIT ETFs miss
Dream Residential, a small Canadian REIT holding 15 Class B apartment properties across three U.S. markets, announced a strategic-alternatives review. Bill’s firm called brokers—including one who had sold the properties to the REIT—and concluded there should be local buyers across the age and quality spectrum.
The stated NAV was about $13.30; Bill initially found units near $7.70-$7.80 and built an average around $8.10. At roughly $9.15, he allowed for liquidation friction and modeled proceeds nearer $11.50-$12, plus an annualized monthly dividend yield around 5%.
From Bill’s firm’s entry, that implied approximately 40-60% one-year total return if a sale completed. The underlying 7-8% cap rate offered support, but Bill stressed that allocation still depends on “forward IRRs” and deal probability; he had already rotated capital from a lower-return holding.
Broad ETFs cannot express that judgment. VNQ held only about 8.8% in multifamily while market-cap weighting concentrated exposure in towers, Prologis, Equinix and Simon; Bill’s firm held roughly 50% residential. Bill and Andrew’s closing puzzle: liquid public assets should historically earn a premium, yet investors can currently choose the desired property exposure at a discount.
Full transcript
You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today's podcast, Bill Chen from Ryzone Partner Returns. Bill is one of the most popular guests on the platform. He's got a deep expertise in all things real estate, publicly and privately traded. He went to Na, I believe it's called. I never know if it's na or na, you know, I'm not a full-time REIT person, but he went last week and we just dive into all things REIT. We talk, you know, apartment reads, New York reads, San Francisco reads, the sass reads, public real estate, private real estate, everything that you can imagine. Bill's got a great source of info. I think you're really going to enjoy it. We dive into everything. We go for almost an hour and a half. So, uh, we're going to get to that in Bill Chat in one second, but first, a word from our sponsors. Today's episode is brought to you by Vin Tool. Fin is the AI junior analyst tailored specifically for individual investors. Everyone in finance is racing to figure out how AI can best be integrated into their investment process. And one of the biggest areas that is catching on with institutional investors is analyzing SEC filings and earnings call transcripts. VIN tool takes hours of combing through filings and control effing transcripts down to seconds. Whether it's comparing the current call with prior quarters, finding that sneaky change in the footnotes or compiling the key facts into an easy to digest one pager. Fin is saving you hours so that you can go deeper and search wider because your time is better spent turning over more rocks or researching the things that AI can't. Go to fintool.com to transform your research process. That's fintool.com. All right. Hello and welcome to the yet another value podcast. I'm your host Andrew Walker with me. I'm happy to have one Bill. I don't even know uh what time it is, but one of the people's favorite guests. Every time he comes on, I get lots of emails about uh people love hearing about the the nuance real estate takes, the overall real estate. Anyway, my friend and the best cricket player I know, uh Bill Chen from Rise Partners. Bill, how's it going?
Great, man. Andrew, good. It’s always great to be on your podcast. I love connecting, and just—a correction: croquet, not cricket. Nothing about cricket.
I remember my hat. Happy Father’s Day to you. Most people listen on audio, but this might be a YouTube podcast for everyone—not because we’re going to have any slides, but because I’ve got my “Number 1 Dad” hat with Sylvie’s handprint right on the side of it here. Bill’s got the elusive Yet Another Value Podcast hat on, at least for now.
At least for now. I’m taking it off because I have one of the world’s largest heads, and it doesn’t look right on me.
Yep. Bill, we have a ton to talk about. We had you on about a year ago, and you went through a ton of stuff in real estate. I think a lot of it played out as you thought it would. The reason we want to have you on today is that you went to NAREIT a week or two ago, and we’re going to have an overall discussion of all sorts of stuff in the real estate sector. Before I turn the ball over to you, I'll just remind everyone quick disclaimer. Nothing on this podcast is investing advice. We're going to talk about a host of names today. So keep that in mind. There's a full disclaimer on the website and at the end of this podcast. I’ll pass the ball over to you, and then I’ll sprinkle in some questions as you go.
We met with a dozen management teams at NAREIT this year, and there’s a huge contrast. We track both the public market and the private market. Our core strategy, as you remember, is to buy stuff in the public market at a deep discount to private-market valuation. We track and follow a lot of real estate GPs, and we get real-time updates on private deals. The sentiment is very, very different at NAREIT.
The key takeaway is that, of all the companies we met, none of them are dealing with any sort of distress. None of them have any issues with their debt. All of them are covering their interest expense anywhere from 3 to 8 times, which is very, very different. On the private side, from a new-debt-underwriting perspective, the debt-service-coverage ratio starts at 1.25, and anything above that is considered healthy.
We just did the math for Mid-America: the interest-coverage ratio is 7.2 times. For Camden, it’s 6.8 times. There’s no scenario—unless they go out and do some big, risky deal, which they’re not going to—in which these companies become troubled, based on those coverage ratios.
A key theme is that a lot of the public REITs, especially the bigger blue-chip ones, are starting to get excited because, consistently across all of them, construction is falling off. This is something we were pounding the table on in late 2023: in today’s interest-rate environment, given the appetite and what you would underwrite to for a development IRR, it doesn’t make any sense to develop new projects. We predicted in late 2023 that the construction that was planned and budgeted for would get done, but fast-forward 18 to 24 months and construction is going to fall off a cliff.
You can see that particularly in multifamily. We’re seeing a 70% to 80% drop-off in market-rate starts for multifamily. There are some affordable, mission-driven projects being greenlit, but aside from that, market-rate apartment units have fallen off—depending on who you talk to—70% to 80%. You’re seeing it in self-storage. If you look at a chart on warehouse starts, across the board you’re seeing construction activity fall off an absolute cliff. It’s anywhere from a minimum of 50% to up to 80% in most asset categories.
You didn’t even need to finish the sentence. I knew what you were going to say.
Yeah, AI data centers—that’s a whole different animal.
What’s really interesting is what we were saying consistently for the past 18 months: these blue-chip REITs have the balance sheet, and they have access to the unsecured-bond market. There have been multiple unsecured-bond offerings. I think the lowest we saw was 4.9%, upwards to the mid-5s. Some of the lower-rated ones may be a little bit in the high-5% range. They’re able to issue 7-year, fixed-rate, unsecured bonds into the market, and then they can use that money to do ground-up developments.
You didn’t even need to finish the sentence. I knew what you were going to say.
From a lender perspective, the lenders who are buying these unsecured bonds aren’t thinking, “Oh, I’m lending 100% of this money to do a risky ground-up development deal.” They’re thinking, “Well, I’m lending into a mostly 95%-occupied, stabilized portfolio with lots of assets—hundreds of buildings—inside a REIT.” Then they can take a portion—kind of like 5% or 6%—of that overall capitalization to do ground-up developments.
So it becomes this cost-of-capital arbitrage, and Mid-America and Camden are both very excited about pushing that. We particularly asked Mid-America, “Hey, instead of a $1.2 billion development pipeline, why don’t you push it to $2 billion?”
Now, granted, this is a $22 billion to $23 billion enterprise-value company, right? So there are limitations. A lot of these REITs have to play in a certain box, or they can’t have too much development. But all of them are flexing their development muscles, and they’re also looking for acquisitions.
That’s a consistent theme. They’re saying, “Hey, if we could buy a brand-new multifamily building that we’re going to hold for 25 years, even if we buy it at a 5% cap rate...” The general assumption is that there will be rent growth in 2026, 2027, and 2028. What could that be? I think minimally probably 3% per year going forward in 2026, 2027, and 2028.
You’re really not going to see a lot of supply come onto the market, probably at least until the second half of 2028 or 2029. The longer that we’re in this higher-interest-rate environment, the longer that’s going to exist. So a lot of these bigger REITs are excited that they’re in a pretty good position. They’re in a much more advantageous position.
We reran the models. I saw that you tweeted out that a few people have asked what we think the forward IRRs are on some of these names. In our model, if you hold it for 3 years, we have—call it—roughly an 18% IRR. If you hold it for 4 years, we’re modeling roughly a 15% IRR. This generally assumes 3% to 4% rent growth in the next 3 years, a 5% exit cap rate, and nothing super crazy. Whatever they do from a capital-allocation perspective, from another development or acquisition perspective, kind of becomes the other variable.
Let me jump in there real quick.
This is the same every time we come on—we have this discussion. But for people who haven't listened to prior episodes or something, the big assumption in that 18% and 15% IRR—which, I mean, you're talking about liquid large caps with a great dividend yield doing mid-teens IRRs. That's the stuff of, “Hey, forget everything else and plop it in.” It's not Warren Buffett in the ’60s, but it's really good. Fifteen percent over 5 years would make anyone's career very nicely.
So, the big assumption in there is a 5% exit cap rate. I just want to push on that a little bit. They're going out—what are they buying when they're looking at acquisitions? What are they looking at in acquisitions?
Generally, if they're buying something that's brand-new construction, they want to be able to buy that at a 5% cap rate. Now, Andrew, you may say, “Well, Bill, they're buying at a 5% cap rate for brand-new construction. This is not a brand-new portfolio.”
That's what I was going to say.
Okay, there you go. I'm anticipating.
I think what's important is that you have to realize that they're willing to go buy that at a 5% cap rate because, obviously, they think that's a great deal, right? And think about who has the capital. Maybe aside from KKR or Blackstone, all the private buyers are essentially out of the market, right?
If you're forced to sell a brand-new ground-up development at a 5% cap rate, you're likely in a position where you have to sell. Most people—most developers—if they could, they would continue to hold this until a time when they could exit at a better price. So, keep that in mind, right? Simply because you see something transact at a certain price, especially if Mid-America and Camden are buying something brand new at a 5% cap rate, doesn't mean that's truly where the market is.
Also, just going back to, okay, well, this is not a portfolio—you know, this is not a 1- or 2-year-old portfolio. This is an older portfolio. But I think there is something about how the public REITs have been trading at a discount to private for a really, really long time. And this is not always the case, right? David Simon famously coined the term “liquidity premium.” Historically, there should be a premium, and I think we're about to go into a period where investors today are not paying anything at all, right? You're not paying anything at all for that optionality.
I would make the argument that if you've got a cost-of-capital advantage, you're large, you're liquid, you're diversified, you should trade at a premium, especially if all the private players have kind of got their hands tied behind their backs because they can't do anything. And then these guys become the acquirers, right? These assets should trade at a premium.
I think also, just from a capital-allocation perspective, both Mid-America and Camden have been kind of plodding along for 2 years, where they're either slightly negative in NOI growth—you know, there's a little bit of NOI decline—or flat NOI growth. We're about to go through a 3-year period, likely, where we're modeling around 3% NOI growth, and I think the algorithm will pick up on that.
It also becomes safe for some of the REIT-dedicated firms and funds, like Nuveen and Cohen & Steers, to say, “Hey, this is quote-unquote investable, right? And that is our strategy. Our strategy is that our LPs give us patient 3-year capital for us to be able to stick with a thesis, as long as we're right in it, right?”
And then there are all the market participants who are like, “Oh, we can't own this going into a period if NOI is going to drop even just 1%.” So, I think a lot of that is going to potentially come back, and it's important to think through where the new buyers are going to come from. I think a lot of traditional REIT investors are going to start to overweight these names.
Let me ask a weird question. You were at NAREIT. It's in NYC. You live in NYC. I live in NYC. We have the mayoral race coming up right now, and I know a lot of my friends are pulling their hair out over the prediction markets and, particularly, who's running in second place.
Obviously, there's a huge political factor, but even ignoring that, we've seen—and you and I have discussed—you've seen the issues with rent control, you've seen issues with huge increases in operating expenses, all this sort of stuff. What were you hearing? And this doesn't just apply to residential, though obviously I was thinking about residential. The overall issues with New York City apply to all of your big office-building companies, lots of people with retail exposure—everything. What were people hearing? What were you hearing about New York City real estate specifically at NAREIT?
Specifically at NAREIT? Or just in general—just your general thoughts? But, yeah, what's interesting is that, Andrew, we did a podcast 2 years ago on Clipper Realty, right? At the time, we still had a lot of that COVID hangover, and I remember Vornado was $12 at that time. People still thought, “Has New York City fully recovered?”
This is the first time that we heard, “Oh, my God, the fundamentals in New York are just—you know, everyone loves New York City exposure because of healthy rent growth, the fundamentals, et cetera.”
Was this across the board—office, retail, and real estate—or was it particularly residential?
No, this is particularly residential. Now, this says nothing about the political conversation, right? What we've been pounding the table about regarding New York and New York City, and why we love New York City so much, is that you can't really build anything here. All this crazy rent regulation makes it even harder for developers to develop, because you're developing into this extremely uncertain environment.
What we've been hearing from the conference is that the Equity Residential, et cetera, of the world are talking about how much they like New York City exposure—or New York, kind of the tri-state area—and how strong the fundamentals are there.
Now, politically, there's a separate conversation about these mayoral candidates and some of these forever rent freezes, government-backed supermarkets, et cetera, which—I don't like to get political—but I came from a communist country, and I hate it. If we're going back to another price-control environment, right?
Look, noted. It's not like The New York Times is the Wall Street Journal editorial board. But I did see this morning that The New York Times was like, “Look, all the candidates—we don't really like any of them. We're not endorsing anyone, but we would specifically say these proposals are crazy, and the background here is not what you'd want in someone who's going to run 300,000 employees.”
So, we would specifically recommend you leave the candidate you're talking about off the table.
Oh, I did not see that. It's a little bit surprising to see The New York Times come out with something like that.
Yeah. You know, because sometimes it's like, “Oh, is this just my super right-leaning, really conservative finance friends who are freaking out about this? Am I crazy to be freaking out about it?” And then you see The New York Times, like, “No, no, this is pretty crazy.”
Okay, this is—okay. Well, I mean, to kind of give you a little bit of context, we're very much in the weeds in multifamily and regulation all over the country, right? If you look at a market like Washington, D.C., where they kind of passed all these regulations where you basically can't evict people, what they found is that the affordable-housing providers—the developers and the mission-driven providers—got themselves into financial situations. These are the people who are building the affordable units.
I can't recall any names right now, but if you can't evict people and people just decide not to pay rent, and there's moral hazard involved, these are the really good Samaritans—the people who are building affordable housing—and they're going to go out of business and have to file for bankruptcy. I think that was a wake-up call for politicians, and they said, “Look, you can't just pause rent growth.”
We probably should have made this conversation into, like, a REIT issue. It's topical, and you were there. I was wondering—as you're saying, it seems like New York City fundamentals have really turned around—but I was wondering if the people who are going to be most impacted are the people who own New York City real estate.
I was wondering if they were indicating any hesitation, or saying, “Hey, we're going to wait to buy new properties until we see what this looks like,” or if they're just like, “Look, if you think about it—”
From what we heard, the big REITs—with the exception of Clipper Realty, which actually has some rent-regulated exposure—the bigger boys, AvalonBay and Equity Residential, their units—I mean, I wouldn't say there's zero rent regulation, because they're very fancy apartments.
Yeah, I mean, they're much higher-end.
So, in a way, they may even say, “Oh, you're going to put in regulation? Our assets are going to be worth more because, from a long-term development perspective, very little is going to be built,” right?
We were a lot more focused on some of our names in the Sun Belt, and then we could take the conversation back to the Sun Belt in the Sun Belt markets.
I mean, it seems like there’s a lot of political will not to impose rent regulation in these markets, in these Sunbelt markets. Population growth continues to be a trend.
By the way, Andrew, one thing we sometimes do with our investments is look at what we said in our underwriting and do a little postmortem to compare what has actually happened versus our stated thesis. It’s a good practice. I generally don’t like to do that because I don’t like to see how terribly wrong I was, and I rub my nose in it already, but it is a good practice.
No, it’s good practice.
It’s also the stated thesis versus what’s actually happened so far—it’s tracking. Usually, when we know we’re tracking a thesis, we gain more confidence that we know the situation.
I crunched some numbers in late 2023, when we did the podcast. If you had bought between $115 and $130 and held until today, IRR would be between 14.7% and 24.2%. If you had sold it recently for between $155 and $170, IRR would have been between 17% and 38%.
It’s a big gap in range, but the bottom is just a hair under 15%. It gives us a little bit of confidence that if we got the thesis right, on a 3-year go-forward basis, we’re underwriting somewhere between 15% for 4 years and 18% for 3 years. We’re sticking with this, and this is one of the bigger parts of our portfolio.
One of the things I’m trying to do today is create a portfolio approach, because maybe some of the listeners say, “What’s so exciting about a 15% to 18% IRR? That doesn’t sound fantastic.”
Who says that?
Maybe they were original investors in Fartcoin or something. But a 15% to 18% multi-year IRR is incredibly tax-efficient. That’s the stuff investors look for.
It’s also about the asset quality. Andrew, you and I have both been in situations where the range of outcomes was all over the place. One of the companies that drove me nuts back in the day was Calumet. The stock could be all over the place, and a renewable project they did in Montana literally came out of nowhere and became the bulk of the value versus what you were getting. There’s a much tighter range of outcomes when you’re literally just owning hundreds of apartment buildings in the Sunbelt over a dozen cities. The range of outcomes is not going to be like the Calumet and the Montana renewable project.
Let me ask you a question on range of outcomes. I just love thinking about this. If we rewound 4 years, all these Sunbelt people would be talking about how work from home was great for them. People in New York City—New York City shut down—didn’t want to pay $5,000 a month to live in a shoebox with everything shut down and high taxes, so they moved out to the Sunbelt and worked from home.
That kind of reversed, or at least changed, and I’m curious about today. AI is coming rapidly. It is here, but it’s really starting to impact jobs, I would say. What are you hearing from these people, particularly on the residential side, but the office side too, if you want? If it’s the data center side, they’re just popping bottles of champagne.
What are you hearing from them about trends in AI? I’m sure it’s really helpful for the residential guys in terms of screening and background checks on applicants and stuff. But I’m wondering if they’re saying, “Hey, we’re seeing a lot of people move out here because of AI.” Or you could tell me the reverse: “Hey, AI—there are 5 big centers where all the big tech jobs are happening, and it’s actually really self-reinforcing the network.” What are they saying there?
They’re not really saying much about where people are migrating to because of AI. If you think about the actual AI jobs, I don’t have the exact number, but my gut tells me that the actual number of people working in AI development in New York City and San Francisco probably isn’t going to make a dent in the Sunbelt.
You are absolutely right in terms of screening tenants and making leasing a lot more seamless, where you don’t need a person to give a tour. One thing we haven’t talked about is that the bigger REITs have the scale and ability to invest in technology that allows them to implement all this technology across 100,000 units. If I own one 300-unit building, I can’t justify spending millions of dollars to come up with some sort of AI algorithm.
These are structural advantages.
Have they quantified how much that advantage is for them? Can they quantify that? I totally believe it exists. I’m just interested in whether they’ve said, “Hey, our operating costs are $20 per unit below your mom-and-pop who owns one 300-unit building because we bought…” But I totally believe it exists.
Yeah, yeah. No, I mean, there are a lot of anecdotes. The bigger guys aren’t doing any paper leases. There are literally people who are no longer at these organizations because they aren’t setting up paper leases and waiting for people to get a wet signature back. From a leasing perspective, you don’t need as many people on site to do the leasing. Even something like leak detection—having that capability—they haven’t quantified any figures.
One thing you could do is look at the EBITDA margin and NOI margin of these publicly traded REITs, and they’re significantly higher than most of the private multifamily deals we’ve seen. A lot of it is scale. They also own better assets, in our opinion. They own bigger assets and more institutional-quality assets, so it’s hard to pinpoint.
I would love to ask that question the next time I see these REIT management teams. At Nareit next year, I’d love for you guys to quantify how much operating improvement you get from that. But let me see—I’m just looking at my notes here.
By the way, just a few key points: We went through this time period, and the maximum NOI drop was less than 2% at Mid-America and Camden. They’re currently at roughly 95.5% occupancy. Despite all this worry about a big surge in supply, occupancy really did not drop. I think part of it is that they’re very good at pricing everything correctly so they can target a certain amount of occupancy, and they strategically decided to give up some price to keep occupancy at those levels.
The other thing that’s really important is that the rent-to-income ratio is between 21% and 23%. That’s very affordable. Think about what people in New York City pay as a percentage of their income in rent. I’d rather not think about it, to be honest with you.
Take Mid-America: They increased their dividend from $5.60 per share to $6.06. This goes to what Andrew and I heard: We heard a lot of stories of private multifamily investors investing in a deal as an LP, and then the GP’s floating-rate debt reset. Guess what? Distribution suspended. We have not seen that at all.
If anything, they continue to increase rents and use all that excess cash flow to do acquisitions and ground-up development. A lot of them are at roughly 4× net debt to EBITDA. They could probably take that up another turn, which is $1.5 billion for a company like Mid-America, allowing them to do more acquisitions or ground-up development.
These are clearly the more structurally advantageous players. You could buy them at roughly 25% loan-to-value, with 7× interest coverage, and you could do 15% IRR owning these. We consider these a very large allocation in our portfolio. Our overall exposure to multifamily REITs is about 50% in one of our hard-asset portfolios, and we love the multifamily asset class. We particularly love the public valuation because of the price we’re able to get.
It’s a very large allocation, and I continue to think they’ll help us perform.
Let me ask you. Every time we talk about REITs, I tell you—and I’m not the only investor, and I’m not accusing any of the especially larger-cap REITs of this—but REITs are controlled companies, right? They are incredibly difficult to go activist on.
For a lot of these—and again, I’m not accusing the large-cap ones, though we could find some small-cap ones that I would, after a few drinks, happily accuse them of.
Oh, we’ve got some. We’ll get to some later on today. They’re more focused on growth for growth’s sake, right? Growth is great for management teams: you’re more prestigious, and you can pay yourself bigger bonuses. They’re not necessarily interested in growth for growth’s sake or intrinsic value per share’s sake.
What I want to ask—last time we did this, a lot of what you said was right. You went through the stats on AvalonBay, and you were pounding the table on this. I think one of my pushbacks was, “Hey, I don’t see management teams with a lot of equity ownership. I don’t see management teams with, in my opinion, a lot of alignment.”
Over the past 15 months, these guys were presented with a pretty interesting opportunity to create value in a lot of different ways. Did you see them, in your opinion, operating in ways that increased intrinsic value per share? Or have they just kind of written the, “Hey, our stocks were undervalued. Let’s not do anything stupid. The stock will go up,” play? There’s nothing wrong with that, but it’s kind of a missed opportunity, in my opinion, if their stocks were trading for a fraction of NAV and they didn’t buy back shares.
The stock worked because it’s growing closer to NAV, but they really could have accelerated that by buying back shares, particularly when they were trading cheaper than NAV and cheaper than other acquisitions. Did you see any examples of them doing things to increase intrinsic value?
I think not so much. Camden did buy back $40 million worth of shares, which, in the grand scheme of things, isn’t a lot. If we get to it, I could talk about Eurofins later, which is a lab-testing business that kind of has a real estate component to it. Eurofins recently bought back roughly 5% of its shares outstanding in 5 months, year to date. That’s a great use of capital. They were kind of complaining that they were trading at half of private-market value, and they just went out and bought back 5% of their shares.
Yeah, exactly. Taking care of it.
Camden went out and bought some shares. Now, in terms of—this is a great natural segue into the grocery-anchor theme. Remember last year, you and I were at a managers’ retreat, and I presented the idea. I said Retail Opportunity Investments Corp., or ROIC, was my best idea. We thought that it would be sold within 3 years when I presented the idea. Of course, within a couple of weeks, Blackstone came in and bid on the company.
We met with Retail Opportunity Investments Corp. last year, and we thought that it was trading at a huge discount. We kind of felt that the CEO was frustrated that a lot of the buy-side investors were asking about Kroger and Albertsons and whether they would get the centers if the deal went through. This is right in your wheelhouse: If the deal goes through, they have to divest to C&S. C&S has a history where, if you sell these supermarkets, they tend to underperform after that. You have Rite Aid’s bankruptcy, all these things.
I think the CEO was just fed up with all these buy-side-style questions that were focused on next-quarter modeling. We saw that in the facial expressions and the emotions. This is why we get so much value out of the NAREIT meetings—these one-on-one management meetings. We could feel the frustration coming through, and we thought, “There’s a good chance that this company gets sold in the next 3 years, and it’s got to be worth a lot more than what it’s trading at.”
That did happen: It was sold to Blackstone, and there was a full process. I wish the price had been a little higher, but we did very well. It was a 15% position for us last year and contributed 4% to the fund’s performance, so you can’t complain about anything like that.
I’m also laughing because I pulled up their proxy in anticipation of this. You said we saw the frustration at NAREIT, and I’m laughing because, if you read the proxy, Blackstone calls the CEO on June 19, which I believe is the week after NAREIT. Blackstone clearly knew, and you were clearly reading it very well, because Blackstone called and, within a month, had a full process kicked off. You were clearly reading the tea leaves very correctly there.
To anyone who’s young and starting to get into investing, this is my word of advice: AI is coming to the investment business, and everyone is going to be using AI. We’ve built some in-house AI tools that have made it very easy for us to get up to speed on companies.
I don’t want to go into too much detail, but we’re able to custom-pull a lot of data and create very systematic outlines of key developments based on earnings calls and whatnot. I don’t want to get into a ton of details because I’m trying to protect some of that advantage. I think everyone is going to be doing this within the next 12 to 24 months, but while we still have some structural advantage, I’d like to maintain it as long as possible.
We utilize these tools to get ready for a lot of these meetings at NAREIT. What I’m trying to say is, we built AI tools, and we have an in-house AI consultant who does a lot of work with us. To anyone who’s young and starting out, get to the management meetings. This is why we consider NAREIT the Super Bowl for what we do: a dozen face-to-face meetings. We meet with them 2 or 3 years early, and then we can compare notes and ask, “Do they make any sense? Are there any body cues?”
If someone is super frustrated, those are really important tells. We had another meeting—I don’t want to name names—with a certain company. We went in super excited, and then we asked a couple of simple questions of management. The CEO became super defensive, and we thought, “That kind of caught our enthusiasm a lot.”
To anyone starting out, going to these management meetings is super critical. I think that is a way for you to AI-proof some of this.
No, look, I think there’s a reason that, if you listen to pretty much anyone—I’m not saying it’s the be-all and end-all—but there’s a reason that, if you listen to the pod-shop people, a huge piece of their process is going to these meetings. They’re taking as many meetings as they can, and that’s a big part of the job.
For me personally, I’ll say that, not that I’ve ever gotten MNPI, but calling a company up and being like, “Hey, can you walk me through this press release?” Sometimes they’ll walk you through the press release, and you’ll be confused about a verb. Or they’ll walk you through a press release, and you’ll be thinking, “Oh, my God, this company is going to sell for a huge premium,” and then you’re like, “Oh, my God, this company wants to spend all of its money on—there’s a grocery store, and they want to become an AI play.” You’d be like, “Oh, God, this is terrible.”
Sometimes you’ll call them up and they’ll say, “Look, we put it in the press release. We meant what we said. We’re going to return all of our capital to shareholders, and we’re excited to do that. We think we’re going to unlock a ton of value, and our chairman is 85, so he needs to start thinking about estate planning.” You’ll be like, “Oh, this is good to go.”
AI isn’t the entire answer, but it’s a big way, whether you’re young or old, to create one of the big edges still out there. It’s a way to AI-proof your job.
Absolutely. This is a natural segue into the next asset class. One of the things I want to do on the podcast is show people that it’s not just a multifamily theme. In today’s environment, you could build out a portfolio, and I call it building out a football-team roster of ideas.
Your safest idea is an under-rented asset with a 15% to 18% IRR. Those are your offensive linemen, right? Then you could throw some running backs in there that are going to help you score touchdowns, and you could underwrite them to a 20% to 35% IRR.
We’ve got to be a little coy because there are a couple of names that we walked away from feeling really, really excited about, but we haven’t totally finished the idea. We haven’t fully built our position. The message I want to get out there is that grocery shopping centers, in my opinion, are a theme that is very undervalued by the real estate world.
Why is that? I think there’s a narrative out there that we’re over-indexed to retail in the United States. There’s a great chart showing that, from 1999 to 2008, we built shopping centers at about 3% of the existing supply every single year for that 10-year period. After the GFC, we dropped down to maybe 75 basis points. Then, over the last 4 or 5 years, we dropped even further, to below 50 basis points per year in terms of supply additions.
So I think that for 15 or 16 years now, this has been an industry where they've, I think, absorbed a lot of that grocery-anchored shopping-center demand in the strip centers, and they have not built a lot of new supply. I think in the interim, if you're a value investor, you probably have looked at Seritage, Sears, and the Class B and C regional mall, right? I'm laughing because I looked at Seritage last week. They paid down some more of the term loan, and you and several others have always been like, “The assets are bad there.” I was like, “Oh, the term loan's starting to get paid down. It's getting to the last assets down here.”
Full disclosure, I think we had a 1% exposure to Sears, or Seritage. We swing-traded it, and then we've just not been involved in it. The Class B and C regional mall is just a really tough asset class to be in. But this is a grocery-anchored shopping center. Imagine a 100,000-square-foot shopping center with a grocery store, your Chinese takeout, your pizza shop, maybe your Pilates studio, and the urgent care.
I personally have a ton of experience because I grew up in a family business where we were the Chinese takeout in the grocery shopping center. I was a fishmonger in the supermarket, so I know this asset class very well from being a tenant in these spaces. There's a historical backdrop where, in the last 15 or 16 years, annual supply additions have been less than 1%. It's been running at about 0.5% per year.
So this narrative of being over-retailed has actually—I think that's getting a little long in the tooth. You have the rise of Amazon, where everyone thought Amazon was going to kill every single retail concept. Then it turns out, hey, your Chinese takeout, your pizza, and your Pilates—if anything, some of the older concepts, like your stationery store—are still there. There used to be a stationery and lotto store in a strip center, but those have kind of gone away. You get more boutique fitness and more retailification of health care: your MRI, your radiology, your urgent cares, and your physical therapy.
Concepts come and go, but what is timeless is that it's convenient. You pull up, you park, and you go in instead of going to a big hospital or a big medical complex where you're pulling in and don't know where you're going.
What's happened particularly in the Sun Belt is that there's been a lot of immigration, but they haven't built because, to build one of these, you need a minimum of 10 to 15 acres. If you're in an urban infill market in Dallas–Fort Worth, or any of these Sun Belt cities, if one exists, it's hard to find another 10 to 15 acres just sitting there at a really busy intersection. We talked to some of the grocery shopping-center REITs, and they said that, to justify building a competing grocery shopping center, rents would have to double from what their tenants are paying right now.
I think most market participants have not figured this out. We're sitting there scratching our heads: “Okay, you could buy—if you want beta exposure, you could get Regency Centers, which we don't really like.” I just want to throw that name out there because people really want the exposure. Regency Centers is generally considered to have the best assets and the best management team in the space. Of course, you have to pay up for that.
Most of the Sun Belt grocery shopping centers are growing NOI by 4% to 4.5% per year. A lot of them, particularly in the Sun Belt, usually have 3% rent escalators when they renew their leases. Because a lot of people have moved to the Sun Belt, rents have gone up, but because there are usually 7- or 8-year leases, a lot of them have not rolled off, as much as multifamily has repriced on an annual basis.
When the leases expire, they can usually increase rents anywhere from 10% to 20% for renewals. On new leases, you're getting 20%. You naturally have a 3% escalator, plus these 10% to 20% increases on renewals and new leases. That growth algorithm becomes a really nice 4% to 4.5% NOI growth per year. If you're able to buy at a 7%, 8%, or even 9% cap rate, that becomes a really nice little algorithm.
The occupancies are on par with a lot of multifamily asset classes. They're in the mid-90s. This is different from regional malls, and it's different from a power center, because on a power center, if you have some sort of major bankruptcy, like Party City or JOANN, you have more exposure to troubled tenants. But the grocery shops—the Krogers of the world and the Trader Joe's of the world—aren't usually going out of business.
As an asset class, there are a couple—two or three names—that we're really excited about. We're not ready to talk about them today on the podcast, but I want to throw this theme out there because I don't think the market is fully pricing it in. There's probably a reason why. If you think about Blackstone, when they see a shift in the market, they tend to be the ones who identify a theme early, and they just went out and bought Retail Opportunity Investments Corp., or ROIC, at essentially a 6.1% cap rate.
If you piece everything together, that ROIC portfolio was 97% occupied with a super-high barrier to entry. That's a very unique asset. Everyone we talked to in the private market said it's almost impossible to get that West Coast exposure, and then, in one deal, Blackstone could do that. I think Blackstone got a really good deal at a 6.1% cap rate. They could keep growing NOI at around 4% per year. That math just works really well if you're financing in the 5% or even low-6% range.
That's a theme we view as the running back. We've got a couple of names—not really to discuss today—but we've got one name we're underwriting to a mid-30s IRR on a 3-year hold. Either they get sold in the next 3 years, or they naturally grow into a certain scale and some of the overhang gets cleaned up. There are others that we like for a mid-20s IRR over 3 years. That's a theme we really like, so we view that as the running back.
Let me ask you just quickly. You mentioned underwriting. Again, if I think back to our last one, or even right now, the big argument is, “Hey, these guys are trading way cheaper than their private-market values.” You had something like Retail Opportunity Investments, ROIC, that got sold. Have you been surprised by the lack of full-company takeouts in the public markets? If I think back to the financial crisis, what did you always hear? “Hey, if you had REITs that were trading below private-market values, a private equity firm would step in, buy the whole company, liquidate it real fast, and realize that.” Have you been surprised?
We haven't. I mean, I can't really think of any.
Have you been surprised?
So, in the grocery shopping-center space, Kimco did a stock-for-stock deal. They bought out another one, and then there's Urstadt Biddle Properties—I can't pronounce that company's name—but there have been 2 deals. So there have only been 3 deals. If you think about how many deals have been happening, you have Blackstone buying out ROIC, Kimco buying the other company, and then there's a third.
On the stock-for-stock deal, it doesn't seem like the implied cap rate is really a takeout, though, right? That's more of a synergy play if two companies merge.
Yeah. And we wouldn't mind it if we got, say, a 50% premium and most of it was in stock from someone we think is also cheap, because then we get to roll that into the acquirer in a stock deal.
I love just the casual, “Hey, look, 50% premium, all stock in a company that's cheap—we'll roll it.” I love that for all of my companies, too.
No, because, Andrew, here's the thing: you get 2 sets of SG&A. Again, think about where we exist in the ecosystem versus the bigger guys. The bigger guys want to buy $5 billion REITs. If you take 2 of these smaller ones—one's a $2 billion company and one's a $3 billion company—and do a stock-for-stock merger, we get a 40% or 50% premium and stock in the bigger one. All of a sudden, it actually is a $5 billion company.
The bigger REITs could say, “Hey, this is liquid enough. We could own this,” and so on. I think there are a lot of ways to do it. We've seen 3 M&A deals in the last 2 or 3 years, and I think that's fairly active for the REIT space.
Let me just, while it's on my mind—I want to hear about your wide receivers in a second—but before I forget, let me ask this question. Office space in general, and maybe San Francisco in particular, but office in general: I've been surprised by how positive I've heard people be overall on offices over the past year. I'd love to ask you what you're hearing about office space in general and what you're thinking about office REITs in general.
Yeah, I think you've got to bifurcate into Class A versus Class B and C. Our next idea is an office idea, Alexander's, which owns Bloomberg's global headquarters.
I think we're definitely—by the way, kudos to your guest who called Vornado, right? Absolute bottom. Yeah, absolute bottom tick. That idea was a great call.
We bought some Vornado preferred at that time at an 11.5% yield, at around 45 cents on the dollar. We made Alexander’s, which is Bloomberg’s headquarters, a 12% allocation earlier this year because we had a view that we’re past the “office is dead” narrative.
We do believe now that the Bloomberg global headquarters has some very unique characteristics. It has a lease that runs through 2040, and you’ve got Bloomberg as a tenant from a credit perspective. The fact that it’s a global headquarters—it’s not some satellite office—makes it a very unique asset on its own. We need to mention that.
But I do think that if you own a Class A office building in New York City, we’re past the narrative that office is dead, at least for Class A office buildings. Class B and C are still very troubled. What I do see, though, is that outside of New York City, there’s still a market for Class B and C offices.
You and I talk about net-lease office properties, and our friend David Bahnsen. You could very easily say that, at the right cap rate, these Class B and C offices transact. There’s a market for them. I think what’s changed is pricing.
Anyone could run a DCF and say, “Hey, if you’ve got 12 years left with a good-credit tenant, you could run that DCF and get it at a cap rate, right?” You get all your money back, and then what’s the residual value of that office at year 12? It becomes easier, and it’s actually one of the less interest-rate-sensitive asset classes out there right now.
It’s funny: when you buy something at a 20% cap rate—it doesn’t particularly matter if interest rates go from 5% to 6% or from 5% to 4%. You’re kind of just hoping that those assets don’t get crazy, crazy worse.
Quick, last question, and then I’d love to focus. We can talk more about Alexander’s, or we can talk about Hudson Pacific Properties. You and I are talking on June 16. Last week, Cohen & Steers, who you mentioned, backstopped a deal for HPP.
People can look the whole thing up, but this was a company with a lot of office exposure, particularly in San Francisco. The stock had been hammered, and it had tons of leverage. Last week, the stock was trading at roughly $2.50, with a $300 million market cap. They announced a deal to raise $600 million in equity, and I was curious whether you had any thoughts or reads on what happened at HPP, whether it bled into the sector, or any HPP-specific thoughts.
Not a ton. We had a tiny amount. I think when we bought it, it was just a little call option on it, just to see if fundamentals improved in San Francisco. It was a way for us to get some exposure.
We’ve seen this before with SL Green. This goes back to 2009, when SL Green was down from around $130 all the way to $10. At the time, they did a tiny little equity offering that maybe increased the share count by 10% to 15%. Depending on who you ask, that’s either a lot or very little.
Obviously, in this case, if you have to increase your share count by more than 150%—I don’t know the exact number, but I think it was literally tripling the share count—that stays off any sort of near-term bankruptcy. At the same time, when you triple the share count, you kind of hold an AIG or Citigroup. You massively dilute the future upside.
My friends who I talked to were saying that it was kind of interesting because, if you look at it as a call option, you’ve really extended the call option by raising that much cash. At the same time, all my friends were saying, “They’ve got a lot of San Francisco. San Francisco is kind of turning. If you do a NAV, because it’s so levered, there are huge ranges, but I kind of think the NAV is $10.”
When you dilute yourself by three times, the NAV goes from $10 to $4.50. There are all these competing factors. It was kind of like, “Maybe it’s a better buy on an enterprise-value basis today,” but I was playing for, “If I’m right, I’m getting a triple.” It was just weird, but it was a crazy situation all around.
Well, then also keep in mind that this is a REIT that was buying back shares at around $21 and decided to invest in the studio business. I don’t know. If you look at some of the Midjourney videos out there, it’s really making me think, “Man, studios?” You look at what generative AI can do with video today, and listeners don’t even realize we’re not even taping this podcast. This whole thing was AI. We just had it make a podcast with Andrew and Bill.
We don’t know HPP. It’s a name that a lot of people have asked us for our opinion on. We never really had a ton of exposure to it, and we never felt comfortable with the balance sheet. I’m glad we had a tiny position—maybe 10 basis points in LEAPS on it—nothing that moves the needle too much if we’re wrong.
To what you were saying about management and incentives, I don’t know the management team that well. But when you buy back shares at $20 and then issue shares in the mid-$2s, and you’re doing it without giving people that $10 upside, you’re doing it—let’s just call it what it is—likely to preserve your job. You’re kind of doing everything wrong.
This is why Clipper has been such a frustrating ownership experience for us, because of everything that has happened with rent stabilization in New York City. To that team’s credit, they continue to pay out the dividend. Some people may argue, “Why don’t you cut the dividend, retain it, and rebuild your balance sheet?” But they continue to execute.
It’s a frustrating company for us to own, but this management team has managed not to dilute much. If people started believing in the story and rates got cut a little, Clipper could potentially be an $8 to $10 stock. We put that in the wide-receiver bucket.
That’s a long way of saying that we don’t have strong opinions on HPP. It’s always been one of those names that people have reached out to us about. We even got a short pitch from Water Boy Capital on Twitter, and he’s been right. I kind of thought it was neither a great long nor a great short. I don’t have a ton of generally great insights on HPP, but I think the corporate governance does stink.
Yeah, it was so interesting because, again, they tripled their share count. I was just looking at it. What are some other wide receivers you’re interested in right now?
I think the 2 wide receivers are Clipper, and we own a little bit of Seaport. You may think Seaport is a running back.
No, I’ll disclose that I have a position in Seaport as well. I did the podcast with Chris Waller maybe 3 months ago, so people can listen to that. But I love Seaport.
Yeah, I think Seaport has a ton of upside. I’ll put it this way: I’ve been in enough of these land-rich ideas, these asset-rich ideas, that I’ve learned there’s a certain volatility and a certain way that they trade.
When you don’t have this nice, steady dividend, like what I’ve consistently been saying about Mid-America and Camden, where they’re super-antifragile and cover their interest payments 7 times, there isn’t a story about whether they can stabilize the building and turn it around. My family and I are going to spend a ton of time in the Seaport this summer. We’re tracking it, and I’m going to come down with you.
You let me know when you want to go. I’ve gone to the Seaport. My wife and I did her birthday party at the Lawn Club, so I know the area.
Yeah, I mean, a croquet game at a lawn club. Do they have croquet there, too?
Yeah, the Lawn Club. I’m pretty sure they’ve got indoor croquet.
I don’t remember them having croquet, but we did the giant beer pong, obviously, and then we did Kan Jam. I was having so much fun with that. We did a ton of stuff. It was a blast, man.
Yeah, yeah. No, I will say, you go to Lawn Club—
So, we went on a Friday night, and I'm sure people want to hear me regale them with the stories of my wife's birthday, but we had a ton of fun. It was reasonably crowded, but I will say we were there on a Friday night, and I was talking to some friends who were there, some of whom are public market investors. We were like, “Hey, I don't know if this is the bull case or the bear case for Seaport.” It was like, this is a ton of fun; there are people here, but if we were in Midtown—if we were at Swingers, a putt-putt place in Midtown, for those who don't live there—this place would be out of this world packed.
One time, I put a charge for Swingers on my wife's credit card while she was away, and she called me up and was like, “Hey, I'm out of town for a week, and you're spending $200 at Swingers?” I was like, “No, it's putt-putt for me and 5 guys. We're not going to swing stuff.” Unrelated. We were saying this place would be out of this world packed, and that's kind of the bull case: we were having fun, and it was really nice. The bear case is that it wasn't completely full. The bull case is that if they could fill up the rest, all of this would really get the thing going. But, yeah, I don't know what I'm saying on Seaport at all.
No, I mean, I think I've followed that story for a really long time. I have anecdotes going back to 2017 and 2018. I think a lot is going to depend on the new CEO and how he's going to reposition it—how he's going to drive traffic to these assets. I mentioned some of this on Bill Brewster's podcast.
I think how they drive engagement and traffic is important, because with more traffic, that's how you're able to get operating leverage in the restaurants and all these assets. That could be a 2-hour conversation—a podcast on its own—between you, me, and Chris Waller, talking about what we're looking for. The asset values are totally there, right?
Look, I do like what you said, though. You were like, “Hey, I've done a lot of these land-rich ones,” and the volatility is there. You're 100% correct. With Seaport, I kept being like, “Hey, there's $18 per share of cash. It can't trade for too far below $25, just because you start getting to the point where the cash covers it.”
But you're right: people don't care. It's a small-cap, basically controlled company. People don't give one fuck what the cash on the balance sheet is. They care about what they're seeing in articles on Twitter—that Seaport is burning $100,000 a day in cash flow.
Yeah, you haven't seen a crazy amount of movement, but that's because it's real estate in New York City. It takes time to lease these things up. I think to get the Meow Wolf lease done and to get 250 ready, I actually think they're moving pretty darn quickly.
No, I agree with you. I do agree with you. One thing I have noticed is that when they decided they were going to do the spin—and to give our listeners a little bit of context, I used to run into the former combined company's CEO, and he would tell me all the weekly operating stats and whatnot. I'm like, “You're probably too engaged,” because he's running a huge organization with all the MPCs, et cetera, et cetera, and then he's telling me about weekly restaurant sales at the Seaport. I'm like, “You probably hit him in the chest every time he saw the reports.”
No, he was actually really bullish, because at one point it was trending in the right direction. Then, once they decided they were going to spin that off, you saw a lot less involvement. It was kind of like, “That's probably someone else who's got to come in and fix that.”
I think what they've done here is right. The MPC assets—Ward Village, The Woodlands, and the Summerlin assets—fit well in a different box. Seaport is a whole different animal. Given all the press releases, and because I also actively follow them on Instagram and their Kasa series, I think they're trying to do more with Kasa. They're trying to host more Kasa events, which will drive more foot traffic there. You need people there; you need people to spend money there. I think it also builds a better brand.
We're tracking it very, very closely. Again, we view that from a portfolio-allocation perspective. Going back to Mid-America, Camden, and FRPH, those are offensive linemen. They're a big part of our portfolio. We have other multifamily names that, in aggregate, make up 50% of the portfolio.
The wide receivers, Clipper and COPT, are kind of 2%–3% allocations each. They're much smaller; they have more torque and more volatility in the names. The grocery shopping centers are probably going to be a big part of the portfolio as well. We have another unnamed multifamily company, because we're trying to build a position where we think it's probably going to get taken out and where the IRR is going to be higher than the market. It's a slightly smaller company. It shall remain unnamed right now, but we do more underwriting on it.
We kind of look at everything from a portfolio perspective. Andrew, this was not the case before 2022. Before 2022, we might have been able to find 1 or 2 really good, high-conviction ideas. In today's environment, we could build a whole team; we could build a whole roster. One thing I promised—and Andrew and I talked about this—is that it would be really fun to see if I could build the whole football team roster of names on this.
Who's the quarterback?
Who's the quarterback of the team?
Who's the quarterback?
I guess you call me the quarterback because I'm calling the plays and making the decisions. Or, like, I'm the head coach, you know?
You're the head coach.
Yeah, yeah, yeah. I'm the head coach. I'm flexing the exposure up and down. But, yeah, want to talk about some special teams?
Yeah, let's hit some special teams.
Let's talk about special teams. I think Dream Residential is really simple. Early this year, there was a tiny little Canadian REIT that came out with a press release that said, “We're exploring strategic alternatives,” which everybody in this business knows means they're looking to sell themselves.
Dream Residential, at the time, had a nice run from the high 6s to the high 7s, and we were looking at it. They had a published NAV of, like, $13.30, and we were able to buy it at, like, $7.70 or $7.80. It was very illiquid; this name has a very low float, full disclosure. You had a $13 NAV, and we were able to buy it at $7.70.
We got on the phone and called all the brokers, and we even tracked down a broker who used to sell these assets to the REIT before it went public. They knew everything about all these properties. There are 15 properties in 3 different markets, Class B assets, and we were buying at, like, a 7% cap rate. Today, it's 7.8, right? Today, the U.S.-dollar-denominated units are $9.15. The NAV is $13.
I think there's going to be slippage from liquidation costs, et cetera, et cetera. Maybe you get $11.50 or $12, right? From an event-driven perspective, that's still a pretty good upside from the $9.15 that you're buying today. Again, you're buying multifamily at a 7.8% cap rate. Now, granted, this is not Mid-America or Camden's quality, right? But there's always a buyer out there.
What I learned about multifamily, and why we're so bullish on it, is that you could be Class A, Class B, or even Class C. We don't really like to go into Class C, but there's a buyer in every local submarket for every spectrum of age, because with the older assets, the buyers can say, “Oh, we've got to do some sort of value-add.” There's a value-creation story that they can tell.
Dream Residential is very simple. They hired TD Securities, they're paying a monthly dividend at an annualized rate of roughly 5%, and you could buy this. It probably gets done in 12 months, because a portfolio like this should be able to move very, very quickly. At the cost we were buying it, we were modeling a 40% to 60% 1-year total return, inclusive of a 5% annualized dividend.
We would have never found an opportunity like that a few years ago. Remember that New York City REIT liquidation a few years ago? Everybody was like, “I think it literally got a 5% cap rate for Class B New York City office,” and every hedge fund was in on it. Fast-forward to today, and you can get an 8.7% cap rate on a multifamily liquidation.
Frankly, some of the long-term listeners have asked, “What about AMH?” We sold some of AMH to redeploy into this name because, as you talk about a lot on one of your podcasts, in a market, it's all about this: if you've got something that is a 20% IRR and you find something that's a 40% to 60% IRR, you should get out of one and go buy the other.
And that's kind of what we did here, right? Now that this has traded up from, call it, the low 8s—$8.10 was kind of our average—and it's gone up to $9.15, there's still decent upside if the spread gets a little tighter. If AMH trades down, we may swap back and forth. It's all about writing forward IRRs on a lot of these.
Yeah, exactly. It's about IRRs and the likelihood of the deal going through. If it's at $12 and you're like, “Hey, it's 50/50 they sell for $13,” then you don't want to be there. But if it's at $12 and you're like, “It's 100%—the LOIs are in,” it's a different story.
I have a quick last question because we've almost gone for an hour and a half, and I'm going to have to wrap this up. Somebody asked this on Twitter, and it kind of struck me: Why do the real estate ETFs suck so much? XLRE, which is the biggest one—American Tower, which is a historic multibagger and a fine company, and Prologis are both great companies with great histories—they're 10% positions.
If I wanted a real estate ETF, when I think of real estate, I think of the stuff you were talking about. I think of self-storage, office towers, and multifamily, but those aren't actually that big in the real estate REITs that I'm familiar with. So why do the real estate REITs suck so much? Are there any that are good?
Yeah, we really have not found one. The one that we track a lot is the Vanguard ETF, ticker VNQ.
Okay. Yeah, I've looked at that one too. I think it's very similar to XLRE.
Yeah. If you look at that weighting, multifamily is an 8.8% weighting in that one. If you look at our portfolio, our portfolio is 50% multifamily.
Yeah. Multifamily is one of the ones where, if you were like, “Hey, what do you want to own?” I'd be like, “40% multifamily would be fantastic.”
Yeah, or even more. If you also think about when a high-net-worth individual or family office wants exposure to real estate, what asset class are they most likely to invest in? Multifamily.
It's not like most family offices or high-net-worth individuals are going to say, “Get me into that data center,” or, “Get me into that tower. Get me some tower exposure.” These are remnants of the public REIT market, where I think they're market-cap-weighted.
It's definitely market-cap-weighted, which is why it's happening. But it's funny to me because maybe it's just a sign that the market is underserved and we need to go launch the Bill and Andrew's Excellent Adventure Multifamily REIT ETF.
To me, I was just so surprised because that's what I would think people would really want to invest in. They want to invest in, “Hey, I get a monthly dividend from multifamily and triple-net-lease power centers,” or whatever, and you just don't get that. You basically get American Tower, Prologis, and Equinix when you buy one.
Yeah, exactly. You get Equinix and the cell tower REITs. Simon Property Group is a big component of it too. Retail is somehow 12% to 13% of it, and a lot of that is Simon Property Group, which is fine—Class A malls make sense. That's probably the type of thing you'd think of in your head when you think about real estate.
But, as you said, local multifamily is a big one. You think of grocery stores or shopping centers. Those are the 2 big ones you think of because that's what the rich dentist family is probably buying, and you don't get that in public markets. There aren't really REITs for it. It just feels—
Yeah. I think the REIT ETF has a lot of issues. One of my friends, Hunter Hopcroft, has talked a lot about that. When you and I first did the podcast in late 2023, we were pounding the table on multifamily, and at that point, something like 60% to 70% of the portfolio was in multifamily. That worked out well for us.
My understanding is that the ETF has an issue, but some of the bigger companies closely track a lot of the ETFs and the overall cap-weighted index. You're not going to find those mutual fund REITs having 20% or 30% residential exposure. They're probably going to be below 10%. You're just not going to get that kind of exposure.
We love what we're seeing in a lot of these simple, easy-to-understand investments. For us, it's like, “This makes a ton of sense.” Every doctor and family office would love to get exposure to some of these grocery shopping centers and multifamily.
That's one thing that jumped out from our first conversation, and Hunter and I have talked about this too. I would always say, “Hey, public markets are at a discount to private markets,” but that's not always been the case. If you rewound 20 years, public markets traded at a premium to private markets, and that was because you had this liquidity.
You weren't at risk of being gated. You could say, “Hey, I want to redeem, and I can get 2% of my money out every quarter for the next 20 years.” You had simple taxes; you could sell and buy. Liquidity like that should theoretically trade for a premium. It's crazy to get a discount.
Bill, it has been an hour and a half. I have one last question before we wrap up. This is definitely past podcast number 5. You've got the Yet Another Value Podcast T-shirt, right?
I'm not sure if I got the T-shirt.
Okay, we'll correct that real quickly. That's the most important question we've got for the podcast.
Bill, Billy Partners.com. Uh and then we also write a um uh I like these ones. Yeah. Yeah. You know, we we write memos, you know, we we write kind of like our thoughts. Um uh you know, we have distribution list. So, uh if you email hardasset 2022gmail.com, uh you know, we we we share our thoughts, we write memos, some of them are even done on a typewriter. uh you know, we we love to get a little more followers. and and and what's great is uh the due diligence that that we did on Dream Residential actually came from one of our followers and and and we were able so so that's something that we we love to build on right like if you are a private GP and you want to you know that that we could connect with and uh get some on the ground like local knowledge uh we would love to connect with that and uh and and you know full spectrum of people who are interested in following our content.
Perfect. Perfect. Well, a hard asset 20223gmail.com. I get your memos. They're infrequent, but I really enjoy them. I'll follow up over email on the shirt situation, and I'm looking forward to having you back on in the near future.
Awesome. Thank you, Andrew.
Buddy, a quick disclaimer: Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.