The REIT sector is currently experiencing a rare wave of five or more simultaneous liquidations. This creates a target-rich environment for nimble, event-driven investors who can actively trade these situations and recycle capital as deals progress and news is released.
The historical assumption that a liquidating REIT's low-end valuation is a safe, lawyer-vetted floor is being proven wrong. Several recent liquidations have seen management revise their initial estimates downward, signaling a shift in the risk profile for these event-driven trades.
A simple cap rate analysis for REITs is misleading. A true total return calculation must add 2-3% for rent growth and factor in the amplifying effect of leverage, which can turn a perceived 6% yield into a 10%+ long-term return.
Unlike highly volatile sectors like chemicals, multifamily real estate is remarkably stable. Even during the largest supply wave in 40 years, the negative impact on net operating income was minimal, demonstrating a less risky way to play capital cycle dynamics.
In a REIT liquidation, management teams with little equity ownership may be incentivized to accept the first reasonable offer to ensure a quick wind-down. This contrasts with an owner-operator who would fight for every dollar, potentially leaving value on the table for shareholders.
While activist Mario Gabelli pushed Griffin REIT for share buybacks, its CEO pursued a transformational strategy. He sold mediocre land in Hartford to fund development of a modern warehouse portfolio in Lehigh Valley, ultimately leading to a buyout at double the price.
Recent poor REIT performance isn't a sign of a broken model. It's the result of a classic capital cycle where cheap money in 2021 fueled a building boom, leading to a supply glut in 2023-24. With new construction now halted, the cycle is turning favorable.
According to fund manager Bill Chen, the most significant valuation dislocations in the REIT sector currently exist in life sciences and cold storage. These sub-sectors, along with self-storage, present compelling opportunities based on high implied cap rates and low EV multiples.