Happy Friday! Another month, and once again markets received higher than expected inflation reports (see “One Big Thing”). This led to a tough week for REITs, as “higher for longer” is now looking like “higher for a lot longer”.

In this issue, we also take a look at some of the new housing proposals from the President’s State of The Union address and ask the question, “do analyst price targets really matter?”

REIT ON FOR MORE!

PRESENTED BY BAM CAPITAL

Finding Opportunity In Any Environment

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.

Visit BAM Capital’s website for more details or to view the fund’s offering memorandum.

REIT ROUNDUP:

Empire State Realty Trust Inc (NYSE: ESRT) March 11, announced that Empire State Realty OP, L.P. its operating partnership, has entered into a new credit facility for a total of $715 million, including a $620 million revolving credit facility and a $95 million term loan facility, maturing on March 8, 2029.

Braemar Hotels & Resorts (NYSE: BHR) March 11, announced it closed on a property-level mortgage financing for the Ritz-Carlton Dorado Beach hotel in Dorado, Puerto Rico. The loan is a non-recourse with a two-year term, interest only and a floating interest rate of SOFR + 4.75%.

Essential Properties Realty Trust Inc (NYSE: EPRT) March 11, announced it has commenced an underwritten public offering of 8 million shares of its common stock on a forward basis with BOA, Wells Fargo, Truist and Mizuho acting as the joint book-running managers for the offering. No price was given.

Phillips Edison & Co Inc (Nasdaq: PECO) March 11, Moody’s Ratings revised its rating outlook on Philips Edison from “Stable” to “Positive” and affirmed the Company’s ratings, including the “Baa3” Issuer Credit Rating.

Equinix Inc (Nasdaq: EQIX) March 12, announced that President/CEO Charles Meyers will transition to the role of Executive Chairman in late Q2 2024. He will be replaced by Adaire Fox-Martin, the current President of Google Cloud Go-to-Market. Present Executive Chairman, Peter Van Camp, will take on a new role as Special Advisor to the Board of Directors.

Crown Castle Inc (NYSE: CCI) March 13, Co-founder of Crown Castle, Ted B. Miller and Boots Capital Management LLC issued an open letter to the CCI Board, recommending a slate of four new directors to the board.

Kite Realty Group Trust (NYSE: KRG) March 13, announced that Fitch Ratings has increased its rating on KRG from “Stable” to “Positive” and affirmed KRG’s ratings, including the “BBB: Issuer Default Rating.

ARMOUR Residential REIT, Inc. (NYSE: ARR) March 13, announced the appointment of VP of Finance and Controller, Gordon Harper, as Chief Financial Officer and Secretary, effective March 11. Mr. Harper will also remain Controller of the company.

DIVIDEND NEWS:

InvenTrust Properties Corp (NYSE: IVT) March 13, announced a 5% increase in its quarterly dividend from $0.2155 to $0.226 per share, payable April 15 to shareholders as of March 31.

Realty Income Corp (NYSE: O) March 13, announced an increase in its monthly dividend from $0.2565 per share to $0.2570 per share, payable April 15 to stockholders of record as of April 1, with an ex-dividend date of March 29.

NOTABLE EARNINGS:

BRT Apartments Corp (NYSE: BRT) March 12, AFFO of $0.38 beat the estimate of $0.28 by 35.71%. Revenue of $23.51 million slightly missed the estimate of $23.82 million but topped revenue from Q4 2022 of $22.71 million.

WINNERS & LOSERS

📈 Biggest Winners This Week: 

• Acres Commercial Realty Corp (NYSE: ACR) Up 5.48%

• Geo Group Inc (NYSE: GEO) Up 4.59%

• BRT Apartments Corp (NYSE: BRT) Up 4.17% 

• DigitalBridge Group Inc (NYSE: DBRG) Up 3.22%

• TPG RE Finance Trust Inc (NYSE: TRTX) Up 3.11%

• Medalist Diversified REIT Inc (Nasdaq: MDRR) Up 3.05%

• Sabra Health Care REIT Inc (Nasdaq: SBRA) Up 2.49%

• One Liberty Properties, Inc. (NYSE: OLP) Up 2.16%

📉 Biggest Losers This Week:

• Diversified Healthcare Trust (Nasdaq: DHC) Down 8.73%

• Great Ajax Corp (NYSE: AJX) Down 8.54%

• Digital Realty Trust Inc (NYSE: DLR) Down 7.35%

• Douglas Emmett Inc (NYSE: DEI) Down 5.95%

• Kilroy Realty Corp (NYSE: KRC) Down 5.86%

• Equinix Inc (Nasdaq: EQIX) Down 5.39%

• Vornado Realty Trust (NYSE: VNO) Down 5.19%

• Crown Castle Inc (NYSE: CCI) Down 5.04%

• CBL & Associates Properties, Inc. (NYSE: CBL) down 5.02%

Prices as of 3/14 12:00 Noon

Upgrades:

National Health Investors Inc (NYSE: NHI) March 12, BMO Capital analyst John Kim upgraded National Health Investors from Market Perform to Outperform and announced a $67 price target.

NewLake Capital Partners Inc (OTCMKTS: NLCP) March 14, Compass Point analyst Merrill Ross upgraded NewLake Capital Partners from Neutral to Buy and announced an $18.25 price target.

… and Downgrades:

Global Net Lease Inc (NYSE: GNL) March 8, BTIG analyst Michael Gorman downgraded Global Net Lease from Buy to Neutral.

Kilroy Realty Corp (NYSE: KRC) March 8, RBC Capital analyst Michael Carroll downgraded Kilroy Realty from Outperform to Sector Perform and lowered the price target from $44 to $39.

ONE BIG THING

Double Shot: REITs Get Hit On CPI, PPI Increases

What: This week’s Consumer Price Index (CPI) and Producer Price Index reports both came in above expectations.

How: On Tuesday, the Bureau of Labor Statistics reported that CPI was up 0.4% for the month of February and 3.2% from February 2023. The monthly gain was in-line with the street’s view, but the annual rate was above the Dow Jones economists’ view of 3.1%. Food costs were flat but energy costs were 2.3% higher and shelter was up by 0.4%. Core CPI (excludes food and energy) was 0.4% higher monthly and up 3.8% for the year. The forecast was for 0.3% and 3.7%.

On Thursday morning, the Producer Price Index (PPI) also came in higher than expected, advancing 0.6% in February versus the expected 0.3% and core PPI up by 0.3% vs the expected 0.2%.

The annual inflation rate of 3.2% is still a long way from the FED’s 2% goal and showing no signs of getting any closer. Either the FED will have to change its goal (unlikely), or interest rates will continue at present levels for a lot longer.

The market’s reaction? It initially shrugged it off and media sources were putting the best face forward, saying that it was about as expected. But REITs did not fare very well. The Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ), which includes REITs and other real estate stocks, was at $88.07 on Monday, but down to $85.33 by Thursday morning.

Bankrate.com reported that as of March 12, the national average for the 30-year mortgage loan was 7.00%. That’s slightly below the 7.25% average of three weeks ago but dead even with where rates were at the end of 2023. The national median average is about 12% lower than it was a year ago, but in many parts of the country, prices are still high. It means that large numbers of prospective homeowners will continue to rent, thus delaying their ability to acquire equity.

Takeaway: Some investors are just plain tired of the waiting game on rate cuts and are determined to drive prices higher before the FED moves. But for REITs, the difficulties which began in early 2022 are still with us. So, be selective!

Biden’s New Housing Proposals: Will They Really Work?

What: In his State of The Union last week, President Biden called for multi-faceted legislation specifically addressing real estate purchases and refinances. Let’s take a look at some of several proposed measures and ask if they will really help prospective homeowners or not:

• $10,000 tax credit for first time homebuyers and people who sell their starter homes. The tax credit would be given over two years in $5000 increments. The White House said it was the equivalent of reducing the mortgage rate by over 1.5% for two years on a median home price.

• Down Payment Assistance of up to $25,000 for First-Generation Homeowners whose families haven’t benefited from the generational wealth building associated with homeownership.

• Lowering Closing Costs for Refinancing. The specific closing cost eliminated would be lender’s title insurance on certain refinances. This would save an average of $750 in refinancing costs.

• Fighting Rent Gouging By Corporate Landlords. The DOJ and FTC recently filed a joint brief, arguing that landlords and property managers are colluding on pricing to inflate rates.

Not So Fast: The tax credit sounds great for sellers, but the reality for buyers could be something else. You can’t give someone a tax credit before they buy a home because there’s no way to prove if they will actually do so. It would have to be given afterwards and that still doesn’t help prospective buyers come up with down payment money, closing costs, funds for moving, new furniture, etc. and they would still need to make the mortgage payments for a full year before they could receive the credit.

Next, with down payment assistance, how does one prove if their family has or has not benefited in generational wealth building from homeownership? Who gets to define wealth? Is it $50,000, $100,000, $1,000,000 or more? And who is considered to be family- parents, grandparents, uncles, aunts, or cousins? What about step or adoptive parents? This proposal sounds great on paper, but in reality, it seems quite farfetched and may be extremely difficult to assess and monitor against fraud.

Lowering closing costs for refinancing, this would be a boon for those refinancing, but nobody at present is refinancing a 4% loan for a 7% loan. Lowering closing costs also means that someone on the other end (e.g. title insurance companies) will be losing income at a time when home sales are already slow and many small companies are struggling. And you can’t simply eliminate lender’s title insurance because it protects homeowners from fraudulent claims against their property.

Fighting “rent gouging” sounds good but is another tricky proposition. Because of inflation and higher home prices, taxes and insurance premiums have seen substantial increases post-COVID. The cost of remodeling/repair materials and labor skyrocketed after 2020 and remains inflated. Landlords were therefore forced to raise rents to cover these higher expenses. If landlords can no longer make a profit, they will sell their rentals and that will lead to displaced tenants, fewer available rentals and ultimately, higher prices.

Cracking down on rental junk fees- This is the proposal that makes the most sense. Tenants are routinely charged application fees, credit score fees, pet fees (one-time as well as ongoing monthly), clean-out fees, and a host of other junk fees during their tenancy. The elimination or more likely, reduction of these fees won’t make landlords and property managers happy, but it won’t put them out of business either. And it will keep more money in tenants’ pockets.

Takeaway: These are the kind of proposals that sound great in a political speech, until you read the fine print or get out the calculator to see the actual savings. It also remains to be seen if any of this will make it through Congress, especially in an election year. Some of the other proposals made by President Biden, such as providing tax credits to build or renovate more affordable homes are more realistic and have a greater chance of appealing to legislators on both sides of the aisle.

ONE FOR THE ROAD

Analyst Price Targets: Do They Matter?

What: A number of analysts have been raising REIT price targets over the past few weeks, despite the fact that many REITs have been struggling. Price target increases have been across several sub-sectors, including hotels, residential, specialty and self-storage REITs.

Why: A price target is the price an analyst expects a particular stock to be fairly valued within the next 12 months, given its recent and historical earnings, along with economic forces that they may either help or hinder its future performance. Analysts typically assign, raise, or lower price targets each time they review a stock.

While price targets tells an investor what analysts are thinking, there is never a guarantee that the analyst will be correct and analysts often disagree on price targets.

For example, on January 30, Deutsche Bank initiated coverage on SL Green Realty Corp (NYSE: SLG) with a Hold rating an a $50 price target. But three weeks earlier, Goldman Sachs had maintained a Sell on SLG with a $36 price target. At that time, SLG was trading near $44, but when Deutsche Bank made its call, SLG was trading near $46 per share. So who was right and when analysts disagree, what should an investor do?

As of Wednesday, SLG was trading over $51 per share, so presently Deutsche Bank looks to be right, but remember these are 12 month projections so those results could easily change.

Takeaway: On the plus side, the lower REIT prices go, the higher the potential upside will be on these price target increases. But while investors should be encouraged that analysts are feeling positive about REITs, the best advice is to use price targets as a guide, but never take them as gospel for making purchase or sell decisions. As noted here last week, in March 2023, when SLG was trading around $18, one analyst maintained a Sell rating on SLG and slashed the price target from $35 to $17. SLG jumped up $3 the next day and proceeded to climb up to a high of $52.10 within a year.

PRESENTED BY BAM CAPITAL

Finding Opportunity In Any Environment

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.

Visit BAM Capital’s website for more details or to view the fund’s offering memorandum.