Happy Friday! It was a fairly quiet week on Wall Street as traders awaited the December Consumer Price Index (CPI) report. About two-thirds of REITs were showing gains for the week. The expected CPI number was 0.2%, which would bring the 2023 total inflation number to 3.2%.

However, on Thursday, the number came in at 0.3%, pushing the annual rate up to 3.4%. The knee-jerk pre-market reaction to sell was swift, only to stabilize with the news that core CPI, which excludes food and energy prices, was in line with expectations. However, the rest of the day was quite volatile, with many REITs selling off. Inflation ticking up could mean the FED will wait longer to begin cutting interest rates.

In this issue: MPW gets “Whacked”, Houses get “Hacked”, and office buildings become ghost towns! REIT on!

Plus, a message from our partner: there's a good reason why this little-known alcohol stock has a bullish price target.

A MESSAGE FROM OUR PARTNER

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REIT ROUND-UP:

American Tower Corp (NYSE: AMT) January 5, announced it has signed an agreement with Data Infrastructure Trust (DIT) in which DIT will acquire 100% of the equity of American Tower’s operations in India for $2.5 billion, subject to government and regulatory approval. Closing is expected to occur in the second half of 2024. American Tower plans to use the proceeds to pay down debt.

Four Corners Property Trust Inc (NYSE: FCPT) January 7, announced it has acquired two Oak Street Health properties for $4.2 million. One property is in Louisiana and the other is in Iowa. Both are corporate-operated, with long-term net-leases.

CareTrust REIT Inc (NYSE: CTRE) January 9, announced a joint venture with a “third party regional healthcare real estate investor” for the acquisition of The Villas at San Bernardino, a 78-unit assisted living and memory care facility in San Bernardino, CA. for $10.7 million in cash on hand.

Chatham Lodging Trust (NYSE: CLDT) January 10, announced the closing of its sale of the Hilton Garden Inn Denver Tech Center for approximately $18 million. Proceeds from the sale will be used for debt repayment and corporate investments.

WP Carey Inc (NYSE: WPC) January 11, announced the sale of a portfolio of 70 office properties net leased to the State of Andalusia for approximately $359 million. The sale is part of the previously announced Office Sale Program to dispose of some offices, as well as the spin-off to Net Lease Office Properties (NYSE: NLOP). Less than 3% of WP Carey’s total portfolio is now office properties, with more sales expected.

DIVIDEND NEWS:

Office Properties Income Trust (Nasdaq: OPI) January 11, announced its Board of Trustees has reduced the regular quarterly dividend from $0.25 to $0.01 per share. The $0.01 per share distribution will be paid on February 15 to shareholders of record as of the close of business on January 22.

WINNERS & LOSERS

📈 Biggest Winners This Week: Mortgage REITs were quite strong

• Net Lease Office Properties (NYSE: NLOP) Up 15.05%

• ARMOUR Residential REIT (NYSE ARR) Up 6.81%

• UMH Properties Inc (NYSE: UMH) Up 6.39%

• AGNC Investment Corp (Nasdaq: AGNC) Up 5.43%

• Invesco Mortgage Capital Inc (NYSE: IVR) Up 4.68%

• Dynex Capital (NYSE: DX) Up 4.06%

📉 Biggest Losers This Week: Healthcare and some Office REITs

• Office Properties Income Trust (Nasdaq: OPI) Down 43.34%

• Medical Properties Trust Inc (NYSE: MPW) Down 29.40% (see “One for the road” for more on that.

• Diversified Healthcare Trust (Nasdaq: DHC) Down 14.33%

• Uniti Group Inc (Nasdaq: UNIT) Down 8.91%

• Hudson Pacific Properties Inc (NYSE: HPP) Down 7.47%

• Braemar Hotels & Resorts (NYSE: BHR) Down 6.83%

Prices as of January 11, 12:00 PM

UPGRADES

National Storage Affiliates Trust (NYSE: NSA) January 5, Keybanc analyst Todd Thomas, from Sector Weight to Overweight, and announced a $45 price target.

Host Hotels & Resorts Inc (Nasdaq: HST) January 8, Bank Of America Securities analyst Shaun Kelley upgraded Host Hotels & Resorts from Underperform to Buy and raised the price target from $18 to $23. 

Franklin BSP Realty Trust Inc (NYSE:FBRT) January 10, JMP Securities analyst Steven Delaney upgraded BSP Realty Trust from Market Perform to Market Outperform and announced a $15 price target.

…AND DOWNGRADES: 

Stag Industrial Inc (NYSE: STAG) January 5, Baird analyst David Rodgers , from Outperform to Neutral, with price target raised from $38 to $41.

Rexford Industrial Realty Inc (NYSE: REXR) January 5, Baird analyst David Rodgers , from Outperform to Neutral, with price target raised from $53 to $61.

Medical Properties Trust Inc: January 5, Keybanc analyst Austin Wurschmidt , from Overweight to Sector Weight. (See “One For The Road” for more on this).

Physicians Realty Trust (NYSE: DOC) January 5, Keybanc analyst Todd Thomas, from Overweight to Sector Weight.

AvalonBay Communities Inc (NYSE: AVB) January 5, Keybanc analyst Austin Wurschmidt , from Overweight to Sector Weight.

SITE Centers Corp (NYSE: SITC) January 5, Wolfe Research analyst Andrew Rosivach, from Outperform to Peer Perform. 

Pebblebrook Hotel Trust (NYSE: PEB) January 8, Bank Of America Securities analyst Shaun Kelley downgraded Pebblebrook Hotel from Neutral to Underperform and announced a $13.5 price target.

Apple Hospitality REIT Inc (NYSE: APLE) January 8, Bank Of America Securities analyst Shaun Kelley downgraded Apple Hospitality REIT from Buy to Neutral to Underperform and lowered the price target from $19 to $18.

 Insider Transactions:

Agree Realty Corporation (NYSE: ADC) January 10, Executive Chairman of the Board, Richard Agree, purchased 10,500 shares of company stock at a weighted average price of $62.57 in an indirect trust. Insiders at Agree Realty have been heavy purchasers of company stock since August 2023.

ONE BIG THING

Office Ghost Towns: 20% Empty And Rising

What: Office space vacancies reach their highest level in 25 years.

Moody’s Analytics published new data this week saying that U.S. office vacancies are at their highest point since 1979. A full 20% of office space in major U.S. cities was not being leased by the fourth quarter of 2023.

This was quite surprising, given all the recent talk about companies mandating workers to return to the office.

Who: Three Texas cities, Houston, Dallas and Austin, have the highest vacancy rates in the U.S. Older buildings in those cities with older designs are the most difficult to fill. But cities like Boston and New York have fared somewhat better.

Moody’s attributes the declining occupancy rates to home and hybrid working becoming more common and interestingly notes that overbuilding in the 1970’s and 1980’s may also be to blame.

Yet strangely, office REITs have been absolutely scorching hot since November. The minute the FED announced no interest rate hike for the third consecutive meeting and the likelihood of three rate cuts in 2024, office REITs took off like a rocket.

SL Green Realty Corp (NYSE: SLG), which holds interest in 59 buildings totaling 32.5 million square feet signed 50 office leases in Q3 2023, but with average tenant concessions of 5.8 months of free rent and a tenant improvement allowance. Occupancy rose from 89.8% in the previous quarter to 89.9% in Q3, but it was down from 92.8% in Q3 2022.

Boston Properties, Inc. (NYSE: BXP) is performing about the same. Boston has 190 properties, totaling 53.5 million square feet and an 88.8% occupancy rate.

Between November 1 and December 31, SL Green had a total return of 60.0%, with Boston Properties’ total return 36.4%. Granted, these REITs were quite oversold with large short positions and due for a rebound. But much of that return was tied to the promises of lower interest rates and that may have little effect upon the desire of employees to work from home.

Takeaway: If office vacancies continue to rise, owning office REITs may not be the place you want to be. If you were smart enough to have purchased shares in November or December and have large gains in them, consider setting stop loss orders or selling covered calls to protect profits. SL Green and Boston Properties are two great REITs in the office sub sector, but they’ve come a long way in a short period of time.

HOUSING NEWS BRIEF

Houses Get “Hacked”: Reinventing The Wheel

What: Gen Z and Millennials discover the benefits of “House Hacking”.

Every so often, new generations discover a practice that previous generations undertook back in the day, and then the youngsters adopt it as their own. However, in an effort to distance themselves from the “old guys”, and to make it sound more palatable, the younger ones rebrand it with a fresh name.

Such is the case with “House Hacking”, Millennial and Gen Z’s new term for buying a home and then renting out part of that home to someone else. The term was first coined by real estate author and investor, Brandon Turner in 2015, who hosted a podcast called “BiggerPockets”.  

House hacking can include renting out a room in a single-family home, buying a duplex and living in one side while renting the other unit, or building a separate structure (e.g. tiny home) on one’s property lot to rent out. The objective is to collect rent to pay for homeowner expenses such as mortgage, insurance, or utilities.

However, this “new” practice actually goes back decades, with the idea of the “Mother-In-Law Suite”, as families would “rent” portions of the house to aging relatives or even friends. If Mom or Dad wasn’t wealthy, perhaps they might contribute a part of their social security check to help defray household expenses.

Sometimes friends or even a stranger would rent part of a home from the owners. In the popular 1990 movie, “Pacific Heights”, a “yuppie” couple rents out the first floor of their upscale San Francisco home to a stranger, and in typical Hollywood fashion, the tenant is revealed to be a con man who then attempts to drive the couple out of their own home.

But leave it to the same generations who discovered Dave Ramsey’s mid 1990’s envelope budgeting system and in 2021 renamed it “Cash Stuffing”, to take this old idea of renting out a portion of a residence and simply reinvent the wheel with a new name.

Pros and Cons: Monetizing one’s home can actually be beneficial for anyone who is facing financial challenges. With higher interest rate mortgages, and escalating taxes and insurance costs, younger homeowners find their budgets strained. Earning several hundred dollars each month from renting a portion of the home can provide a welcome financial boost.

Another benefit of House Hacking is if the owners eventually sell the home to the tenant, they can eliminate the usual 6% of the sales price commission that would go to a Real Estate Brokerage, while getting the tenant’s rent paid up through the day of closing.

However, there are also several potential negatives to House Hacking, such as the risk of confrontations over the tenant’s noise or odd behaviors, possible property damage, a loss of the owners’ privacy and eviction hassles if the tenant fails to pay their rent.

Since homeowners are frequently wary of having a stranger live with them, they often choose to rent to someone they know, such as a relative or friends. But the downside is if problems develop with the tenancy, it can lead to the end of those friendships or to severely strained familial relations.

Finally, if you’re thinking of House Hacking your own residence, keep in mind that any rent received must be reported to the IRS on Schedule E of your annual income taxes. And yes, that includes cash. Tax evasion between $301 and $20,000 is considered a third-class felony, which could potentially have a person “hacking” a jail cell for a couple of years.

ONE FOR THE ROAD

MPW: The Big Crash!

WHAT: After the bell on January 4, healthcare REIT Medical Properties Trust Inc (NYSE: MPW) announced it’s accelerating its efforts to recover uncollected rents from Q4 2023 and outstanding loan obligations from its largest tenant, Steward Health Care System. Steward still owes approximately $50 million to MPW in unpaid rent and outstanding loans.

Despite this, MPW curiously agreed to fund a new $60 million bridge loan to Steward, secured by pre-existing collateral plus a new second lien on Steward’s managed care business. Additionally, Steward will explore the possible sale or re-tenanting of certain hospital operations, along with the divestiture of non-core operations.

MPW also said it will take a non-cash charge of $225 million to write off consolidated straight-line rent receivables along with other items. It also agreed to defer Steward’s unpaid rent and to defer about $55 million in rents in 2024 until June 30 or the completion of anticipated asset sales by Steward.

In its announcement, MPW added, “No assurances can be provided that further impairment of real estate and non-real-estate assets will not be taken with Medical Properties Trust’s fourth-quarter 2023 reporting.” Not good.

Who: Medical Properties Trust is a Birmingham, AL based healthcare REIT that owns and operates 441 general acute care and other properties across the U.S. and 9 other countries, with locations in Europe and even Australia. It has a total portfolio of $19.0 billion, of which about 64% are general acute care hospitals, and about two-thirds of its properties are in the United States.

Wall Street Reacts: The next morning, Keybanc analyst Austin Wurschmidt downgraded Medical Properties Trust from Overweight to Sector Weight. Wall Street investors were also quite disturbed with this announcement and ran for the exits, driving Medical Properties shares down more than 33% in early morning trading. Shares finished the day at $3.55, down an ugly 29%. On the following Monday, shares were down another 2.1% and touched a low of $3.31 on Wednesday before rebounding.

Takeaway: Imagine this scenario- You decide to rent out an unused room in your house to a friend, but after several years of slacking off on rent payments, he now owes you $10,000. You even lent him $1000 one time when his old car broke down and he couldn’t get to work. So given this, would you now lend him even more money and use his old car or some other shaky asset as collateral so he can pay back the $11,000 he owes you? And would you also give him another six months of deferred past due rents?

Well, that’s how investors saw it. They’ve had enough with MPW extending more credit to deadbeats. The stock hit a high of $19.81 at the beginning of 2022, but has since fallen nearly 82%. The MPW crash brought about the lowest share price since the end of the bear market in March 2009. Investors who’ve hung on since 2022 have dealt with declining earnings and revenue, ineffective management and at times a troubling lack of transparency.

The $0.22 quarterly dividend per share now yields more than 24% annually and will almost certainly be cut. The only question is- by how much?

To anyone considering buying MPW after this massive drop, Caveat Emptor!

A MESSAGE FROM OUR PARTNER

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It also helps to explain why one research firm believes the company to be undervalued and gave it a bullish price target. Click here to read more.