Happy Friday! A huge sell-off in Tech stocks pushed Wall Street’s money flow into REITs again this week. Several lower-priced REITs that have performed poorly as interest rates were rising had solid double-digit returns this week.TheVanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was up 2.48% for the week, and up an amazing 6.51% over the past two weeks.

In This Issue: Arbor Realty Trust is under an FBI/DOJ investigation for fraud, Prologis kicks off REIT earnings season on a high note and the Biden Administration seeks a rent cap on big landlords, but will it work?

REIT ROUNDUP:

Gaming and Leisure Properties Inc(Nasdaq: GLPI) July 12, announced it’s entered a binding term sheet with Bally’s Corporation to buy Bally’s Kansas City Casino, Shreveport Casino and land under Bally’s permanent Chicago Casino for a total purchase price of $1.585 billion.

Medical Properties Trust Inc (NYSE: MPW) July 11, CBS News is reporting about a federal probe in Boston into alleged criminal activity by Dallas-based Steward Health Care for fraud and violations of the Foreign Corrupt Practices Act. The law prohibits U.S. citizens and commercial entities from engaging in corrupt activities overseas. An agreement between Steward and the government of Malta to run three state-owned hospitals is at the center of a Malta criminal corruption probe. Steward recently filed for bankruptcy and was Medical Properties Trust’s largest tenant.

SITE Centers Inc(NYSE: SITE) July 15, announced a one-for-four reverse stock split, beginning on August 19. The reverse split was authorized on May 8, 2024, at the annual shareholders’ meeting.

SL Green Realty Corp (NYSE: SLG) July 17, announced it sold out all 10 units of its Giorgio Armani residence on Manhattan’s Upper East Side for $168.2 million. Sales will close in the fourth quarter of 2024.

Kimco Realty Corp (NYSE: KIM) July 17, announced it’s amended and upsized its unsecured term loan from $200 million to $500 million.

Braemar Hotels & Resorts (NYSE: BHR) July 18, announced it’s closed on the Hilton La Jolla Torrey Pines sale in La Jolla, CA for $165.00 million. Braemar Hotels will continue to evaluate the sale of two more hotels between 2024-2025.

Upgrades:

UDR Inc (NYSE: UDR) July 15, BMO Capital analyst John Kim upgraded UDR from Market Perform to Outperform and raised the price target from $39 to $45.

and Downgrades:

SBA Communications Corp (Nasdaq: SBAC) July 15, Wells Fargo analyst Eric Luebchow downgraded SBA Communications from Overweight to Equal-Weight and lowered the price target from $230 to $220.

Armada Hoffler Properties Inc (NYSE: AHH) July 15, Jefferies analyst Peter Abramowitz downgraded Armada Hoffler Properties from Buy to Hold and lowered the price target from $13 to $11.

Dividend Increases:

NNN REIT Inc (NYSE: NNN) July 15, announced an increase to its quarterly dividend from $0.5643 to $0.58 per share, payable August 15 for shareholders as of July 31. This is the 35th consecutive annual dividend increase, making NNN one of only three publicly traded REITs to have increased its annual dividend for 35 years or more.

Second Quarter Earnings: (see “One Big Thing” for more on Prologis’ earnings)

WINNERS & LOSERS

📈Biggest Winners This Week: Lower-priced REITs blast higher on CPI news

• Industrial Logistics Property Trust (Nasdaq: ILPT) Up 20.64%

• Service Properties Trust (Nasdaq: ILPT) Up 17.29%

• Global Net Lease Inc (Nasdaq: GNL) Up 13.22%

• Peakstone Realty Trust (NYSE: PKST) Up 11.44%

• National Storage Affiliates Trust (NYSE: NSA) Up 10.77%

• PotlatchDeltic Corp (Nasdaq: PCH) Up 10.39%

• City Office REIT Inc (NYSE: CIO) Up 10.19%

• Clipper Realty Inc (NYSE: CLPR) Up 8.77%

📉 Biggest Losers This Week: Few losers again this week.

• Wheeler Real Estate Investment Trust Inc (Nasdaq: WHLR) Down 19.37%

• Arbor Realty Trust Inc (NYSE: ABR) Down 15.26%

• Medalist Diversified REIT Inc (Nasdaq: MDRR) Down 5.64%

• Hannon Armstrong Sustnbl Infrstr (NYSE: HASI) Down 1.84%

• Digital Realty Trust Inc (NYSE: DLR) Down 1.73%

ONE BIG THING

Arbor Realty Trust Under Investigation By The FBI/DOJ

What: On July 12, reports surfaced thatArbor Realty Trust Inc(NYSE: ABR) was being investigated by Federal Prosecutors in the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) in New York.

Who: Arbor Realty Trust is a Long Island-based mortgage REIT (mREIT) that initiates bridge and mezzanine loans for commercial and residential properties. Arbor Realty generates profits by the spread between the loan financing cost and the interest earned from that loan. Many of its commercial loans are short-term mortgage liens with higher interest rates.

Why: Investigators are looking into claims originally made by short seller, Viceroy Research, that Arbor Realty Trust was hiding losses and fabricating the value of its loan portfolio by financing asset purchases from its own foreclosures in off-balance-sheet transactions. This newsletter brought you that story two months ago. Viceroy called this “an elaborate and intentional con.”

Arbor Realty Trust issued this statement on Friday: “We routinely cooperate with regulatory inquiries and are very confident that we conduct ourselves properly. We look forward to our second-quarter earnings call.”

Takeaway: Arbor Realty Trust shares collapsed 19% on Friday and finished at $12.39. By Thursday morning it had rebounded slightly to $13.40. Arbor Realty will release its second-quarter earnings on July 26.

Will Joe Biden’s Proposed Rent Cap Help Or Hurt Renters?

What: This week the Biden Administration proposed legislation that would impose rent caps of 5% on landlords with more than 50 units in their portfolio. Any such landlord who raises rent by more than 5% in one year would be subject to having tax credits such as accelerated depreciation write-offs withdrawn for three consecutive years. President Biden called on Republicans to join Democrats in approving the proposal.

Why: Rents have gone way up over the last three years. Although there is a political gain to be made from such an announcement, the reason given for the proposal is that rents have increased too much and this cap would temper future rent increases for a few years until more units are completed. More than 20 million rental units could be affected by this legislation, if it’s approved.

Not So Fast: Realistically, this proposal has little chance of passing through the House and Senate, but it sounds good to millions of renters. It’s also coming at a time when many rents are stabilizing anyway. The June CPI reported the shelter index rose 0.2%, the slowest monthly increase in three years. Annually, shelter prices rose 5.2%.

In addition, the policy excludes new construction and buildings that are being substantially renovated. This exclusion was added to continue the motivation to construct or renovate more housing and apartments. That means landlords of new units still have free reign to raise rents as desired. And just who will decide what “substantially renovated” means?

Another possibility is that landlords who own slightly more than 50 units will sell off enough units to fall just below 50, thereby avoiding the legislation.

Finally, the rent cap is only in effect for two years. National Economic Advisor Lael Brainard said it’s meant to “serve as a bridge until more housing units are built.”

Takeaway: There is another potential risk to this proposal. When the state of Florida imposed a $150 limit on what Homeowners Association management companies could charge homeowners for an “estoppel letter” (statement of whether past HOA dues or fees are still owed) to close on a sale, many management companies who had not been charging that much used that ruling for raising estoppel fees to $150.

Could the same thing happen if such a cap was enacted? Would landlords not planning on 5% rent increases then routinely raise the annual rent by 5%? The proposal raises more questions- How would the Federal Government monitor the millions of leases to ascertain whether landlords follow the mandate? And what if the newly constructed apartments expected within two years charge even more rent than the older units?

Finally, what happens if taxes, insurance, maintenance, building materials and labor rise more than 5%? If landlords lose money, rental units will likely be sold and newly purchased units with limited property equity could end up in foreclosure. These are all questions never addressed in the proposal.

Wall Street doesn’t seem too concerned about the proposal passing through Congress. Shares of Mid-America Apartment Communities Inc (NYSE: MAA), AvalonBay Communities Inc (NYSE: AVB) and other residential REITs continue to move higher this week.

ONE FOR THE ROAD

Prologis: First REIT To Report Q2 Earnings, Beats Estimates

What: On July 17, Prologis Inc(NYSE: PLD) became the first REIT to release its second-quarter 2024 operating results. It reported Funds From Operations (FFO) of $1.34, beating the street estimate of $1.33. Revenue of $2.008 billion beat the consensus estimate of $1.875 billion and topped its revenue of $1.65 billion from Q2 2023.

In addition, Prologis updated and slightly lifted its 2024 guidance on Core FFO from $5.37-$5.47 to $5.39-$5.47.

WHO: Prologis is a San Francisco, CA-based Industrial REIT that owns and manages approximately 1.2 billion square feet of space in 5576 industrial logistics properties throughout the U.S. and 18 other countries. Prologis leases space and supplies equipment, robotics and other services to its customers. It was founded in 1983 and has approximately 67,000 customers. At the end of the second quarter of 2024, its occupancy rate was 96.4%, down from 97.2% in Q2 2023.

Prologis has been a terrific growth stock and stalwart Industrial REIT for many years. Its total return since November 1997 is 634.49% including collected dividends, or 1,425.09% if dividends were reinvested.

But Prologis has struggled in 2024. Its first-quarter earnings were lackluster and the shares have had a total return year-to-date of -15.59%. Its 52-week range is $96.64-$137.52.

However, shares stormed higher in the morning, following the earnings announcement. After closing at $121.49 the previous day, shares touched $129.16 mid-morning before pulling back in the afternoon to close at $123.21, up 1.42% for the day. Prologis has always been more of a growth stock than one purchased for income. Its $3.84 annual dividend presently yields 3.11%.

One analyst weighed in on Prologis this week. BMO Capital analyst John Kim reiterated Prologis at Market Perform and maintained a $115 price target.

Prologis short percentage of float has declined 4.7% since its last report. That’s a bullish sign. Prologis recently reported that it has 10.10 million shares sold short, or about 1.42% of all regular shares available for trading.

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