🏘️ Blackstone Buys Apartment Income REIT for $10 Billion

Also, Toll Brothers Trounces the Competition

Author

Ethan Roberts
April 12, 2024

Happy Friday! Another hot CPI report caught the street off guard on Wednesday, sending all three major indices significantly lower and putting a thumping on interest-sensitive REITs that had been performing well for the previous three days. The REIT-heavy Vanguard Real Estate Index Fund ETF (NYSE: VNQ) sank 3.56% on Wednesday. The PPI report on Thursday was slightly better than expected and helped stabilize REIT prices.

In This Issue: Blackstone Buys Apartment Income REIT for $10 Billion, Toll Brothers Trounces the Competition, and No Let Up in March Inflation.

REIT ON FOR MORE!

PRESENTED BY BAM CAPITAL

BAM Capital has one of the most impressive track records of any real estate fund manager we’ve seen. On 12 exited assets, investors have realized an average IRR of 35.14% with an average hold period of 3.4 years.

Its latest fund, the BAM Multifamily Growth & Income Fund IV, aims to acquire Class A & B assets located near major economic drivers with a focus on Midwest markets with strong demographics and quality school systems.

Using the BAM Companies vertically integrated platform, the fund plans to drive revenue and create operating efficiencies by seeking opportunities that can benefit from organic rent growth or select renovations to justify future rent increases.

REIT ROUNDUP:

Highwoods Properties Inc (NYSE: HIW) April 4, announced the sale of nine office buildings of 435,000 square feet in Raleigh, NC for $16.9 million. Proceeds from the sale are being used to reduce the debt owed on Highwoods’ revolving credit facility and for general corporate purposes.

Invitation Homes Inc (NYSE: INVH) April 8, announced it has agreed to acquire approximately 500 newly built homes for $140 million in Charlotte, NC, Jacksonville, FL, and Nashville, TN.

Whitestone REIT (NYSE: WSR) April 9, announced it acquired Scottsdale Commons, a 69,000 square-foot commerce center in Scottsdale AZ for $22.2 million. Scottsdale Commons is 96.6% occupied with 20 tenants.

Crown Castle Inc (NYSE: CCI) April 10, appointed Steven Moskowitz as its new President and CEO, effective April 11, replacing interim President/CEO Anthony Melone. Mr. Moskowitz recently served as CEO of Centennial Towers Holding L.P. and also had 12 years in various executive roles at American Tower Corp (NYSE: AMT).

Sunstone Hotel Investors Inc (NYSE: SHO) April 10, announced it’s acquiring the Hyatt Regency San Antonio Riverwalk Hotel for $230 million. The acquisition will close in late April and is expected to contribute about $0.06 of AFFO in 2024.

WINNERS & LOSERS

📈 Biggest Winners This Week: Residential and Industrial REITs

  • Apartment Income REIT Corp (NYSE: AIRC) Up 22.5%

  • Geo Group Inc (NYSE: GEO) Up 11.25%

  • Modiv Inc (NYSE: MDV) Up 8.90%

  • Centerspace (NYSE: CSR) Up 8.07%

  • Industrial Logistics Property Trust (Nasdaq: ILPT) Up 5.70%

  • Paramount Group Inc (NYSE: PGRE) Up 5.57%

  • Independence Realty Trust (NYSE: IRT) Up 5.51%

📉 Biggest Losers This Week: Mortgage and Office REITs

  • Invesco Mortgage Capital Inc (NYSE: IVR) Down 10.84%

  • Peakstone Realty Trust (NYSE: PKST) Down 7.81%

  • Global Net Lease Inc (Nasdaq: GNL) Down 7.66%

  • Claros Mortgage Trust (NYSE: CMTG) Down 7.49%

  • Healthpeak Properties Inc (NYSE: DOC) Down 6.71%

  • American Tower Corp (NYSE: AMT) Down 5.46%

  • Creative Media & Community Trust Co (Nasdaq: CMCT) Down 5.22%

  • Arbor Realty Trust Inc (NYSE: ABR) Down 5.20%

Prices as of April 11th at noon

Upgrades:

Tanger Inc (NYSE: SKT) April 5, Bank of America analyst Jeffrey Spector upgraded Tanger from Underperform to Neutral and raised the price target from $24 to $31.

Acadia Realty Trust (NYSE: AKR) April 5, Bank of America analyst Craig Schmidt upgraded Acadia Realty Trust from Neutral to Buy and raised the price target from $18 to $20.

Public Storage (NYSE: PSA) April 5, Wells Fargo analyst Eric Luebchow upgraded Public Storage from Equal-Weight to Overweight and raised the price target from $280 to $310.

Digital Realty Trust Inc (NYSE: DLR) April 9, Wells Fargo analyst Eric Luebchow upgraded Digital Realty Trust from Equal-Weight to Overweight and raised the price target from $135 to $155.

UDR Inc (NYSE: UDR) April 10, Piper Sandler analyst Alexander Goldfarb upgraded UDR from Underweight to Neutral and raised the price target from $34 to $40. 

… and Downgrades:

Kimco Realty Corp (NYSE: KIM) April 5, Bank of America Securities analyst Jeffrey Spector downgraded Kimco Realty from Buy to Neutral and lowered the price target from $24 to $20.

Retail Opportunity Investments Corp (Nasdaq: ROIC) April 5, BOA Securities analyst Spector also downgraded Retail Opportunity Investments Corp from Neutral to Underperform and cut the price target from $14.50 to $12.

Broadstone Net Lease Inc (NYSE: BNL) April 8, Wolfe Research analyst Andrew Rosivach downgraded Broadstone Net Lease from Outperform to Peer Perform.

Apartment Income REIT Corp (NYSE: AIRC) April 9, Janney Montgomery Scott analyst Robert Stevenson downgraded Apartment Income REIT from Buy to Neutral. April 10, BMO Capital analyst John Kim downgraded AIRC from Outperform to Market Perform and raised the price target from $36 to $39.12. April 11, Wolfe Research analyst Andrew Rosivach downgraded AIRC from Outperform to Peer Perform and Wedbush analyst Richard Anderson downgraded AIRC from Outperform to Neutral and raised the price target from $35 to $39.. (see story below for more info).

Clipper Realty Inc (NYSE: CLPR) April 11, JMP Securities analyst Aaron Hecht downgraded Clipper Realty from Outperform to Market Perform.

Arbor Realty Trust Inc (NYSE: ABR) April 11, Wedbush analyst Jay McCanless downgraded Arbor Realty Trust from Outperform to Neutral and lowered the price target from $17 to $13.

Dividend News:

Agree Realty Corporation (NYSE: ADC) April 8, announced an increase of its monthly dividend from $0.247 to $0.250 per share.

Tanger Inc: April 10, announced a 5.8% increase in its annualized dividend from $1.04 to $1.10 per share and a quarterly dividend of $0.275 per share, payable on May 15 to shareholders of record on April 30. 

ONE BIG THING

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Blackstone Buys Apartment Income REIT For $10 Billion.

What: On April 8, Blackstone Inc (NYSE: BX), via real estate fund Blackstone Real Estate Partners X, agreed to buy Apartment Income REIT Corp in an all-cash transaction valued at roughly $10 billion, including the assumption of AIRC’s debt. Blackstone plans to take the entire portfolio private. As a result, upon the closing of the sale, AIRC will no longer be listed on the New York Stock Exchange (NYSE).

Who: Apartment Income REIT, aka AIR Communities, is a Denver, CO-based residential REIT that owns 76 rental housing communities with 26,626 units across 10 states on both U.S. coasts.

How: The purchase price of $39.12 per share represents a 25% premium to AIRC’s closing price on April 5, 2024. Blackstone will invest approximately $400 million more to maintain and improve the existing communities in the portfolio. The deal is expected to close in the third quarter of 2024. As of April 8, Apartment Income suspended its quarterly dividend of $0.45 per share.

The Plot Thickens: One would think that AIRC investors would be tickled pink, as shares were trading over 22% higher following the announcement.

But wait- less than a couple of hours post announcement, here come the lawyers, sharpening their pencils and claiming that investors got a raw deal. Ademi LLP said it’s investigating AIRC for possible breaches of fiduciary duty and other law violations in its transaction with Blackstone. Ademi noted that the transaction agreement unreasonably limits competing transactions for AIRC by imposing a significant penalty if AIRC accepts a competing bid. Ademi also stated that AIRC insiders will receive substantial benefits from “change of control arrangements.”

Halper Sadeh LLC, another investor rights law firm announced it’s also investigating ARIC, saying the Board neglected its fiduciary duties to shareholders by failing to obtain the best possible consideration, determine whether Blackstone is underpaying for AIRC and disclose all material information necessary for AIRC shareholders to adequately assess and value the merger consideration.

But wait, there’s more! About two hours later, the law firm of Wohl & Fruchter LLP announced it too was investigating the fairness of the sale, saying that the $39.12 sales price is below the price targets of at least two Wall Street analysts. And the next day, former Attorney General of Louisiana, Charles C. Foti, Jr., Esq. and the law firm of Kahn, Swick & Foli, LLC also announced their investigation of the AIRC sale to Blackstone.

Takeaway: Within the past six weeks, both Raymond James and Mizuho have downgraded AIRC, the former from Outperform to Market Perform and the latter from Buy to Neutral. Mizuho lowered the price target from $37 to $31.

AIRC shareholders take note- on Friday, April 5 your shares closed at $31.11. One trading day later, AIRC shares closed up over $7.00 at $38.36. The last time your shares were $38 was in September 2022. Between then and the day before the announcement, AIRC shares had a total loss of 16.85%, including dividends. That’s not exactly a standout performance.

Looking at both sides of the issue, AIRC investors can decide if the board acted in their best interest or not.

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Toll Brothers Trounces The Competition

What: Over the past six months, Toll Brothers has outperformed other homebuilder stocks by a wide margin.

Who: Toll Brothers Inc (NYSE: TOL) is a Fort Washington, PA-based homebuilder that builds luxury, high-class homes in prestigious locations across 24 states.

How: Despite rising interest rates in 2023, homebuilder stocks still managed to climb the wall of worry and perform well. The sector as a whole peaked in July but thereafter pulled back until finally bottoming at the end of October.

However, something interesting happened after that. While most homebuilder stocks like Lennar Corp (NYSE: LEN), KB Home (NYSE: KBH) and DH Horton Inc (NYSE: DHI) began slowly moving up in tandem, one homebuilder, Toll Brothers, began to distance itself from the rest of the pack.

Here are the total returns of the above four homebuilder stocks between November 1, 2023, and April 9, 2024:

  • TOL: Up 76.44%

  • LEN: Up 56.06%

  • KBH: Up 52.58%

  • DHI: Up 52.27%

While an investor would have done quite well buying any of these stocks in early November, it’s clear that since then, Toll Brothers has demonstrated superior relative strength and returns versus the rest of the sector.

Why: Strong-performing stocks are all about the earnings. On February 20, Toll Brothers reported GAAP earnings per share (EPS) of $2.25 per share, easily beating the street estimate of $1.78. Revenue of $1.95 billion also beat the estimate by $70 million and topped its Q1 2023 revenue of $1.78 billion.

There are several other reasons for Toll Brothers’ success. As recently reported by CNBC’s Jim Cramer, the decline of share counts in homebuilder stocks such as Toll Brothers was one factor.

The lack of supply among older homes for sale also contributed to homebuilder sales in general, and Toll Brothers benefited from that, along with declining construction times and lower commodity prices.

Toll Brothers’ upscale homes are priced higher than most other homebuilders. Its average home price is nearly $1 million. That worked well for them with well-to-do cash buyers as well.

Last but not least, a Virginia land sale in February by Toll Brothers for $181 million in Virginia garnered a remarkable $175 million pre-tax gain.

Toll Brothers’ strong earnings also enabled it to raise its dividend 9.5% in March, from $0.21 to $0.23 per share. The dividend has been raised four times since 2019, and the forward yield is now 0.70%.

Takeaway: The question now is, will Toll Brothers’ recent success continue? It would seem so. Toll Brothers shares have gained 7.2% since March 1, but even with the gains since November, its forward PE ratio is still only 8.68. Any further reductions in interest rates will only help with sales.

Note: Toll Brothers is more of a growth than income stock, so it may not be suitable for purely income-oriented investors. But had you invested $10,000 in Toll shares in August 1995, you would now have over $317,900. That’s not too shabby.

ONE FOR THE ROAD

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No Let Up In March CPI Inflation: Now What?

What: The March Consumer Price Index (CPI) came in hotter than expected again, versus both core and non-core estimates, sending the major indices down significantly. The Dow was down over 500 points in early morning trading and the Nasdaq was off about 2%. The S&P was off about 1%.

How: March CPI rose 0.4% for the month and 3.5% annually, above estimates for 0.3% monthly and 3.4% annually. Core CPI (excluding food and energy) was up 0.4% for the month and 3.85% from a year ago. The estimates were for 0.3% and 3.7%.

Effect On REITs: Wednesday morning’s report struck another heavy blow on real estate investment trusts (REITs). By mid-morning, office REITs such as SL Green Realty Corp (NYSE: SLG) were down over 6.5% and industrial REITs such as Prologis, Inc (NYSE: PLD) were off 4.3%. Stalwart triple-net REITs such as Realty Income Corp (NYSE: O) NNN REIT Inc (NYSE: NNN) and Agree Realty Corp (NYSE: ADC) were off 3% and more.

Fortunately, the March Producer Price Index (PPI) report on Thursday came in at 0.2%, down from 0.6% in February and below the Dow Jones consensus for 0.3%. Core PPI met expectations at 0.2%. That helped REITs and stocks in general stabilize after Wednesday’s losses.

Takeaway: It would seem that Wall Street’s hopes for three FED rate cuts in 2024 are just about gone. The key question investors have now is whether the Fed will be able to cut rates at all this year.

Higher inflation readings will continue to put a headwind on REITs, as they have for many months now since 2022. But for long-term income investors, this creates yet another opportunity to pick up REITs at attractive levels with higher dividend yields. EPR Properties (NYSE: EPR) now sports a yield of 8.2%. WP Carey Inc (NYSE: WPC) is back over 6%. Realty Income is not far from a 6% yield.

But investors should build REIT portfolios carefully because the better stocks will likely appreciate more quickly than the laggards once this inflation fiasco ends.

PRESENTED BY BAM CAPITAL

BAM Capital has one of the most impressive track records of any real estate fund manager we’ve seen. On 12 exited assets, investors have realized an average IRR of 35.14% with an average hold period of 3.4 years.

Its latest fund, the BAM Multifamily Growth & Income Fund IV, aims to acquire Class A & B assets located near major economic drivers with a focus on Midwest markets with strong demographics and quality school systems.

Using the BAM Companies vertically integrated platform, the fund plans to drive revenue and create operating efficiencies by seeking opportunities that can benefit from organic rent growth or select renovations to justify future rent increases.