Bill Chen on why the opportunity exists right now in publicly-traded Real Estate
Oct 9, 2023
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Real estate investor and Managing Director at Rhizome Partners, Bill Chen, discusses the discrepancies between publicly-traded and private real estate markets, explores the current real estate environment in relation to historical periods, and shares his real estate thesis. He also talks about liquidation premium, geographic risk, financing during a distress cycle, and why this opportunity exists in publicly-traded real estate.
There is a discrepancy between private market value and public market value in real estate, presenting an opportunity for investors.
Owning public real estate provides advantages such as liquidity, diversification, lower transaction costs, and simplified taxation.
Publicly traded real estate companies are well-prepared for a potential distress cycle and have the flexibility to capitalize on opportunities.
Deep dives
Public Real Estate Opportunity
Despite the rough times for real estate, there is a discrepancy between private market value and public market value. Public real estate is seen as an opportunity due to this discrepancy. The drawdown in rates has led to a 35-37% drawdown in the FTSE-NAPY All Equity Index. Historical data shows that a 30% drawdown in the 14-day REIT Index leads to a 109% forward return for the next five years. This provides a great setup for stock picking in the real estate sector. The speaker emphasizes the excitement in the market and the potential for multi-family, net lease, and other real estate sectors.
Benefits of Public Real Estate
Owning public real estate provides several advantages. One advantage is liquidity, allowing for quick buying and selling. Diversification is another advantage, as investing in multiple markets reduces risk. Transaction costs are lower in the public market compared to the expenses involved in buying and selling private real estate. Additionally, managing real estate assets in the public market is less time-consuming and doesn't involve direct responsibilities such as dealing with tenants or property maintenance. Public real estate also eliminates the tax complexity associated with private ownership.
The Inefficiency in Public Real Estate
Publicly traded real estate often trades at a discount compared to the private market value. However, the speaker explains that this inefficiency can be attributed to factors such as liquidity premium and simplified taxation. While private real estate offers advantages such as tax benefits and control over capital allocation, it comes with higher transaction costs and demands more involvement from investors. On the other hand, public real estate provides diversification, lower transaction costs, simplification of taxation, and the ability to take advantage of historical debt structures.
Opportunities for Public Real Estate in Distressed Cycle
Publicly traded real estate companies are well-prepared for a potential distress cycle. They have conservative balance sheets and retain significant amounts of cash. This allows them to finance distressed acquisitions and take advantage of distressed developers and sellers with looming maturity dates. While there may not be significant insider buying or share buybacks currently, the capital markets remain open for these companies. The availability of free cash flow and the retention of earnings offer flexibility to capitalize on opportunities.
Opportunity in Real Estate Investments
Investing in real estate presents an opportunity with potential high returns. The current market conditions, where interest rates are low, make real estate an attractive option for investors. With cap rates at seven percent, the risk-reward profile is favorable. Additionally, the long-term prospects for real estate remain strong due to the persistent housing shortage in the US. Even in the event of a 20 percent stock market sell-off, real estate investments could offer improved returns of eight to nine percent. The combination of price appreciation, cash flow, and leverage contribute to the overall attractiveness of real estate as an investment asset.
Understanding Real Estate Performance and Market Factors
The recent underperformance of publicly traded real estate investments has created an opportunity for savvy investors. While concerns about interest rates and future supply exist, looking at real estate from a long-term perspective widens the scope for potential returns. The 40 percent contribution of housing to the CPI acknowledges the importance of real estate. With a favorable exit cap rate assumption of seven percent and a free cash flow yield of six and a half percent, real estate investments can deliver significant returns over a four to five-year cycle. The resilience of real estate, combined with the potential for cap rate compression and asset appreciation, provides investors with competitive IRRs of eight to nine percent, even under conservative assumptions.
Bill Chen, a real estate investor and Managing Director at Rhizome Partners, returns to the podcast to provide his latest insights on what's happening in publicly-traded real estate market, private real estate market and literally everything real estate in between.
[1:38] Discrepancy between publicly-traded real estate and private market value / what's going on in REITs
[4:27] How does current Real Estate environment relate to similar historical periods
[9:26] Bill Chen's current real estate thesis
[13:58] Liquidation premium and where we are in the real estate cycle
[22:43] Public market trades below the private market - why shouldn't public market real estate trade for discount to private market?
[26:45] Real estate diversification, geographic risk and tax breaks
[38:38] Running apartments buildings net debt
[43:25] How to finance a distress cycle and capital allocation strategies during this time
[52:51] Why invest in real estate vs. (for lack of a better term) a lot of other stuff right now
[1:01:21] Why Bill Chen thinks this opportunity exists right now in publicly traded real estate
Today's episode is sponsored by: Alphasense
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