Happy Friday! Last Friday, investors got a jolt when a disappointing July jobs report triggered fears of a recession and concerns that the FED is waiting too long to cut rates. That led to three days of huge losses on the major indices. REITs fared better than tech as a flight to safety, but even some REITs were hit hard. The Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) lost 2.61% on Monday and was down about 1.5% for the week.

Thursday brought some relief when the initial unemployment claims came in below expectations, as investors are scrutinizing each new report now for clues about a possible recession.

In this issue, 4 REITs that survived the big market pullback, mortgage rates fall but still may not help homebuyers much and four REITs to avoid at all costs.

REIT ROUNDUP:

CBL & Associates Properties, Inc. (NYSE: CBL) August 7, announced it closed on the sale of the Layton Hills Mall in Salt Lake City, UT, to Second Horizon Capital for $37.125 million. Net proceeds from the sale were applied to a term loan principal balance.

Equtiy Residential (NYSE: EQR) August 7, announced it will acquire 11 apartment properties from Blackstone Real Estate (NYSE: BX) for approximately $964 million. The transaction will close in Q3 2024.

Terreno Realty Corp (NYSE: TRNO) August 5, announced it has acquired an industrial property in Washington, D.C. for a purchase price of approximately $7.6 million. The property is an industrial distribution building of 26,000 square feet on 0.7 acres.

Caretrust REIT Inc (NYSE: CTRE) August 1, reported it has funded approximately $378 million in new investments this week, including a $260 million senior mortgage loan and a $43 million preferred equity investment for a 37-facility skilled nursing and seniors housing portfolio in Oregon, Washington, and other Pacific Northwestern states.

Upgrades:

EPR Properties Inc (NYSE: EPR) August 5, RBC Capital analyst Michael Carroll upgraded EPR Properties from Sector Perform to Outperform and raised the price target from $48 to $50.

Diamondrock Hospitality Co (NYSE: DRH) August 5, Compass Point analyst Floris Van Dijkum upgraded Diamondrock Hospitality from Neutral to Buy and announced a $10 price target.

Vornado Realty Trust (NYSE: VNO) August 8, Piper Sandler analyst Alexander Goldfarb upgraded Vornado Realty from Underweight to Neutral and raised the price target from $22 to $30. Also August 8, BMO Capital analyst John Kim upgraded Vornado Realty from Market Perform to Outperform and raised the price target from $29 to $40.

…and Downgrades:

Alexandria Real Estate Equities Inc (NYSE: ARE) August 2, Jefferies analyst Peter Abramowitz downgraded Alexandria Real Estate from Buy to Hold and lowered the price target from $136 to $127.

Extra Space Storage Inc (NYSE: EXR) August 5, Bank of America Securities analyst Jefferey Spector downgraded Extra Space Storage from Neutral to Underperform and lowered the price target from $172 to $155.

Public Storage (NYSE: PSA) August 5, Bank of America Securities analyst Jefferey Spector downgraded Public Storage from Buy to Neutral and maintained the price target at $318.

Prologis Inc (NYSE: PLD) August 5, RBC Capital analyst Michael Carroll downgraded Prologis from Outperform to Sector Perform and raised the price target from $124 to $127.

RLJ Lodging Trust (NYSE: RLJ) August 5, Compass Point analyst Floris Van Dijkum downgraded RLJ Lodging from Buy to Neutral and announced a $10 price target.

Hudson Pacific Properties Inc (NYSE: HPP) August 8, Piper Sandler analyst Alexander Goldfarb downgraded Hudson Pacific Properties from Overweight to Neutral and lowered the price target from $7 to $6.

Dividend News:

Veris Residential Inc (NYSE: VRE) August 5, announced an increase to its quarterly dividend from $0.065 to $0.07 per share, payable October 16 to shareholders of record as of September 30.

Simon Property Group Inc (NYSE: SPG) August 5, announced a raise to its quarterly dividend from $2.00 to $2.05, payable on September 30 to shareholders on September 9.

Terreno Realty Corp (NYSE: TRNO) August 7, announced an increase of 8.9% to its quarterly dividend from $0.45 to $0.49 per share. The dividend is payable on October 11 to shareholders as of the close of business on September 30.

Second-Quarter 2024 Earnings News:

The table below shows the REITs that not only beat the analyst estimates for earnings and revenue but also topped their numbers from the same quarter a year ago:

WINNERS & LOSERS

📈 Biggest Winners This Week:

• Clipper Realty Inc (NYSE: CLPR) Up 15.61%

• Newlake Capital Partners Inc (OTCMKTS: NLCP) Up 6.30%

• Ventas Inc (NYSE: VTR) Up 6.51%

• Acres Commercial Realty Corp (NYSE: ACR) Up 5.33%

• UMH Properties Inc (NYSE: UMH) Up 4.86%

• Vornado Realty Trust (NYSE: VNO) Up 4.54%

• Net Lease Office Properties (NYSE: NLOP) Up 4.51%

• Mid-America Apartment Communities Inc (NYSE: MAA) Up 4.23%

📉 Biggest Losers This Week:

• Hudson Pacific Properties Inc (NYSE: HPP) Down 18.93%

• Service Properties Trust (Nasdaq: SVC) Down 13.32%

• Chatham Lodging Trust (NYSE: CLTD) Down 8.54%

• Claros Mortgage Trust Inc (NYSE: CMTG) Down 7.98%

• City Office REIT Inc (NYSE: CIO) Down 7.53%

• Community Healthcare Trust Inc (NYSE: CHCT) Down 7.23%

• SL Green Realty Corp (NYSE: SLG) Down 7.20%

• BrightSpire Capital Inc (NYSE: BRSP) Down 6.90%

ONE BIG THING

6 REITs That Soared While Markets Crashed

What: Through the first three trading days of August, the Dow lost 2,139 points the S&P 336 and the Nasdaq 1400 points. Recessionary fears were stoked when the July jobs report said that nonfarm payrolls grew by only 114,000, while the market expected 185,000. In addition, the unemployment rate hit 4.3%, triggering the widely followed “Sahm rule” (meaning the economy is in recession if the three-month average of the jobless level is .50% above the 12-month low). About two-thirds of all REITs were in negative territory but a small handful bucked the trend during those three days and stood out from the rest.

Who Were They?

The six big gainers were:

• Clipper Realty Inc (NYSE: CLPR) Up 8.38%

• Acres Commercial Realty Corp (NYSE: ACR) Up 5.87%

• Mid-America Apartment Communities Inc (NYSE: MAA) Up 4.83%

• Camden Property Trust (NYSE: CPT) Up 3.80%

• Realty Income Corp (NYSE: O) Up 3.05%

• Agree Realty Corporation (NYSE: ADC) Up 3.04%

Why did these REITs perform so well? A few highlights:

On July 29, Agree Realty received an upgrade on its issuer rating from S&P Global Ratings, from BBB with stable outlook to BBB+. Then on August 5, Truist Securities analyst Ki Bin Kim maintained Agree Realty with a Buy and raised the price target from $68 to $77. Agree also topped the estimates on Q2 AFFO and revenue on July 23.

On August 1, Clipper Realty reported second-quarter FFO of $0.17 per share which beat the analyst consensus estimate of $0.12 by 41.67% and was over 30% above its Q2 2023 FFO of $0.13 per share. Revenue of $37.34 million beat the estimate of $36.00 million and topped Q2 2023 revenue of $34.54 million.

On August 1, Camden Property Trust reported FFO of $1.71, which beat the analysts’ estimate of $1.67 per share. Revenue of $387.15 million beat the estimate of $385.15 million and topped Q2 2023 revenue of $385.50 million. On August 5, Camden Property received price target hikes from Wedbush analyst Richard Anderson ($118 to $131) and RBC Capital analyst Brad Heffern ($114 to $122).

Mid-America also beat the estimates on FFO and revenue and received price hikes from three different analysts. ACRES Commercial Realty reported FFO of $0.51 per share, beating estimates of $0.46, and just missed the estimate on revenue, $20.936 million to $21.150 million.

As for Realty Income, it likely rode on Agree Realty’s coattails, plus investors were anticipating a strong Q2 earnings report. After the bell on August 5, Realty Income reported FFO of $1.06, beating the street by a penny, and revenue of $1.34 billion, which topped the street estimate of $1.25 billion and its Q2 2023 revenue of $1.02 billion by 31.40%. Unfortunately, Realty Income now sees AFFO of $4.19-$4.28, but the estimate is for $4.39.

Takeaway: Summing it up, always look for the REITs that beat the earning estimates, receive upgrades or target price hikes and raise dividends. Then you can sleep peacefully at night, even on those rare occasions when the market crashes. 

Mortgage Rates Fall To 6-Month Lows: Will It Continue And Does It Matter?

What: Freddie Mac reports U.S. 30-year mortgage rates averaged 6.73% in the week ending August 1, the lowest percentage since early February. One year ago, the average 30-year rate was 6.90%. The 15-year mortgage was averaging 5.99% this week. One year ago, the 15-year average was 6.25%.

Why: Many people do not realize that bond prices influence mortgage rates and usually precede the FED rate changes up or down, and not the other way around. As the September FED meeting draws closer, the bond market will determine how much mortgage rates will decline.

How: But how much of a difference will it make? That’s the key question. The chart below shows the S&P CoreLogic Case-Shiller U.S. National Home Price Index. Notice that after a small blip downward in 2023, home prices rose again between 2023-2024. The U.S. average price home in February 2023 was $293,450. By May 2024, it had climbed to $323,478 as of May 2024.

As was noted here last week, when prices rise, they usually offset declines in the interest rate. The $30,000 rise in average home prices year-over-year means the interest rates have to decline substantially for a homeowner to have the same Principal and interest (P&I) payment in 2024 as in 2023. Take a look at the following numbers:

With 5% down, the loan amount on a $293,450 home is $278,777. Using last year’s 6.90% average 30-year loan rate, the monthly P&I payment was $1,836.

However, if the average price rises to $323,478, with 5% down the loan amount becomes $307,304. Using this week’s interest rate of 6.73%, the monthly P&I is now $1,989, or $163 more than in 2023. The interest rate has to fall to 5.98% for the P&I to equal the 2023 payment. And it was unaffordable for most first-time homebuyers then!

So what would it take to make a real difference? At 4.95%, the monthly payment on today’s average-priced home would be $1,640, saving prospective homebuyers about $200 per month. But barring a huge recession to rival the one in 2007-2009, how likely is the U.S. to see 4.95% soon?

In addition, a $30,000 increase in home prices means that the 5% down payment amount rises by $1500. Closing costs will also increase by about $1000. Therefore, saving enough to get into a home, even with lower interest rates will become more difficult.

Takeaway: The only answer to the present housing dilemma is that home prices must decline along with interest rates and by a large margin. If home prices retreat to the February 2023 level and the interest rate declines to 5%, the monthly payment falls to $1,497. But that’s a lot to ask unless we get a whopper of a recession. And that’s when the investors step in with cash.

So one can expect the rental market to remain strong for many months. That should be a positive for residential REITs such as Mid-America Apartment Communities Inc (NYSE: MAA), AvalonBay Communities Inc (NYSE: AVB) and Invitation Homes Inc (NYSE: INVH).

ONE FOR THE ROAD

4 REITs To Avoid At All Costs

What: REITs that miss their earnings and revenue estimates or reduce full-year 2024 earnings projections should be avoided until they show they can turn things around. Misses on estimates often trigger price declines and the stocks even fail to rally much when the market is strong.

WHO:  National Storage Affiliates Trust (NYSE: NSA), Angel Oak Mortgage REIT Inc (NYSE: AOMR), Hudson Pacific Properties Inc (NYSE: CIO) and Community Healthcare Trust Inc (NYSE: CHCT).

Why: National Storage’s second-quarter FFO of $0.62 per share missed the estimate by a penny, was below its Q2 2023 FFO of $0.68 and revenue of $190.45 million missed the estimate of $197.21 million and declined from $215.51 million year-over-year. National then announced its full-year 2024 FFO from $2.40-$2.56 to $2.36-$2.44 per share. That’s a big ouch.

Angel Oak Mortgage reported a Q2 loss of $(0.09) per share, missing the consensus estimate of $0.23 by 139.13%! Revenue of $9.463 million missed the consensus estimate of $9.561 million.

Hudson Pacific reported Core FFO of $0.17 per share, missing the $0.18 estimate. Revenue of $218.00 million missed the projection of $216.70 million but was below Q2 2023 revenue of $245.16 million. On August 8, Hudson was downgraded and had its target price cut by two analysts, Alexander Goldfarb of Piper Sandler and John Kim of BMO Capital.

Community Healthcare Trust reported Q2 FFO of $0.53 per share, missing the estimate of $0.55 and 15.87% below the Q2 2023 FFO of $0.63. Revenue of $27.516 million missed the $30.665 million estimate and decreased from $27.810 in the year-ago quarter.

Takeaway: A bad quarter is often followed by a sharp decrease in share price. Another reason to avoid REITs after an earnings miss is they frequently receive analyst downgrades after a poor showing. That usually precipitates additional selling as well. As of Thursday morning, Community Healthcare Trust was down 7.23% and Hudson Pacific was down by 18.93%.

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