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ONE BIG THING

Fed Cuts 50, REITs Respond

What: On Wednesday, September 18, Federal Reserve Chairman Jerome Powell announced a 50 basis point cut in interest rates. At first, the major indices shot higher but gave up their gains by the closing bell to finish slightly lower. However, the next day, indices bolted higher from the open bell and maintained lofty positions throughout the morning.

Who: Office REITs such as SL Green Realty Corp (NYSE: SLG) Hudson Pacific Properties Inc (NYSE: HPP) and Vornado Realty Trust (NYSE: VNO) gained 3% to 4% on Wednesday. Mortgage REIT, Arbor Realty Trust Inc (NYSE: ABR), which has recently been under attack by short sellers had a good day as well, up 2.38%. Others over 2% included Safehold Inc (NYSE: SAFE), Newlake Capital Partners Inc (OTCMKTS: NLCP) and Empire State Realty Trust Inc (NYSE: ESRT).

Why: All week long, markets were breathlessly anticipating what the Federal Reserve would do. CME Group’s FedWatch tool had traders pricing in a 67% chance of a half-point (50 basis point) cut as of Tuesday, but that was challenged when August retail sales came in up 0.1%, much higher than the decline of 0.2% economists expected. The July figure was also revised up from 1.0% to 1.1%.

In addition, the Atlanta Fed raised its Q3 GDP growth estimate from an annualized 2.5% to 3.0%. Some said this would end the chance of the Fed cutting interest rates by 50 basis points and the 67% probability of a half-point cut declined to 59% after the news.

But at 2 PM, Jerome Powell told the world the Fed was indeed cutting interest rates by a half percent and there was a good chance of another cut before the end of the year. The Fed acted aggressively to end the interest rate hiking cycle necessitated by crushing inflation since 2021.

Takeaway: Although REITs look overextended short-term the Fed announcement should be good news for the sector in the long run. Funds From Operations (FFO) should increase as borrowing for property purchases and refinancing becomes less expensive and 5% to 8% dividend payouts will become more attractive as investors find they can no longer expect to receive 5% from fixed-income assets.

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REIT Roundup:

SITE Centers Corp (NYSE: SITC) September 17, announced it sold 13 wholly-owned properties thus far in the third quarter for an aggregate total of $714.30 million and has acquired six convenience shopping centers for an aggregate gross price of $111.20 million. When it spins off Curbline Properties Corp on October 1, the new REIT is expected to be capitalized with $600 million in cash, $400 million in an undrawn, unsecured line of credit and a $100 million unsecured delayed draw term loan and no indebtedness. Curbline will be devoted exclusively to convenience store and restaurant properties and the new symbol for Curbline Properties Corp will be (NYSE: CURB).

SITE Centers also announced that Connor Fennerty, the current CFO of SITE Centers, will become the new CFO of Curbline Properties and Gerald Morgan will replace Mr. Fennerty as SITE Centers’ CFO. Mr. Morgan was previously the CFO of Four Corners Property Trust Inc (NYSE: FCPT).

Apartment Investing and Management Co (NYSE: AIV) September 16, announced it will receive $56 million of preferred equity from Sixth Street to develop a luxury waterfront rental development in Miami, FL. The apartment will be a 38-story tower and include 113 luxury rental units, an amenity package and 7000 square feet of ground floor retail space. The 2500+ square foot units will have unobstructed views of Biscayne Bay.

Paramount Group Inc (NYSE: PGRE) September 13, announced its board of directors has decided to suspend its quarterly dividend that would have been payable on October 15 to fortify its balance sheet and maintain financial flexibility. The three quarterly dividends already paid in 2024 have used up Paramount Group’s 2024 taxable income. Interestingly, the stock has rallied since the announcement was made.

Creative Media & Community Trust Corp (Nasdaq: CMCT) September 18, announced the completion of the conversion of the top two floors of an office building in Los Angeles from office space to 68 luxury one and two-bedroom apartments. The remaining office space in the three-story, 143,000-square-foot building at 4750 Wilshire Blvd will keep the same address, while the apartments will have the address of 710 S. Hudson Avenue.

Upgrades:  

So many REITS were upgraded this week, we’ve put them into a table format to make it easier to read!

Downgrades

Sun Communities Inc (NYSE: SUI) On September 16, Evercore ISI Group analyst Steve Sakwa downgraded Sun Communities from Outperform to In-Line but raised the price target from $144 to $149.

RLJ Lodging Trust (NYSE: RLJ) On September 13, Wells Fargo analyst Dori Kesten downgraded RLJ Lodging from Equal-Weight to Underweight and lowered the price target from $11 to $9.

CubeSmart (NYSE: CUBE) On September 13, UBS analyst Michael Goldsmith downgraded CubeSmart from Buy to Neutral but raised the price target from $53 to $54.

Alexandria Real Estate Equities Inc (NYSE: ARE) On September 13, Citigroup analyst Nick Joseph downgraded Alexandria Real Estate from Buy to Neutral and lowered the price target from $130 to $125.

NexPoint Real Estate Finance Inc (NYSE: NREF) On September 19, Raymond James analyst Stephen Laws downgraded NexPoint Real Estate Finance from Strong Buy to Market Perform.

Insider Transactions:

Weyerhaeuser Co (NYSE: WY) September 13, James C. O’Rourke purchased 7,800 shares at an average price of $32.01 for a total of $249,676.

Equity Lifestyle Properties (NYSE: ELS) September 17, Marguerite Nader, President and CEO sold 33,000 shares of company common stock at a weighted average price of $75.52, for $2,492,160.

Winners & Losers

📈 Biggest Winners This Week: Office and Hotel REITs

• Kilroy Realty Corp (NYSE: KRC) Up 14.18%

• Peakstone Realty Trust (NYSE: PKST) Up 13.61%

• Park Hotels & Resorts (NYSE: PK) Up 11.25%

• Xenia Hotels & Resorts (NYSE: ABR) Up 10.67%

• Pebblebrook Hotel Trust (NYSE: PEB) Up 9.62%

• Hudson Pacific Properties Inc (NYSE: HPP) Up 9.28%

• Net Lease Office Properties (NYSE: NLOP) Up 8.92%

• American Healthcare REIT Inc (NYSE: AHR) Up 8.53%

• Empire State Realty Trust Inc (NYSE: ESRT) Up 8.45%

📉 Biggest Losers This Week: Healthcare, Data REITs

• Strawberry Fields Reit Inc (NYSE: STRW) Down 7.43%

• Healthcare Realty Trust Inc (NYSE: HR) Down 4.25%

• Ventas Inc (NYSE: VTR) Down 4.09%

• NetSTREIT Corp (NYSE: NTST) Down 3.74%

• Crown Castle Inc (NYSE: CCI) Down 3.58%

• American Tower Corp (NYSE: AMT) Down 3.45%

• Regency Centers Corp (NYSE: REG) Down 3.23%

ONE FOR THE ROAD

Glut Of Life Sciences Labs Creates 20% Drop In Lease Values

What: Life Sciences properties are no longer in high demand and are now creating vacant office space that is forcing landlords to lease these spaces at a market discount of up to 20%.

Why: The downsizing of office space during the COVID-19 pandemic led landlords to over-develop life science lab space at a rate more than five times greater than before the pandemic. Lab space was custom-designed with special features such as state-of-the-art ventilation, fire safety, power systems and upgraded climate controls.

However, since its peak in 2022, the demand for this type of space has waned. Biotech and pharmaceutical companies have stopped expanding as venture capital financing has dried up. Dylan Burzinski, an analyst at the real estate analytics firm, Green Street Advisors, said that the declining values were also due to high interest rates and supply and demand pressures.

Who: REITs such as Alexandria Real Estate Equities Inc (NYSE: ARE), Diversified Healthcare Trust (Nasdaq: DHC), Ventas, Inc (NYSE: VTR) and Kilroy Realty Corp (NYSE: KRC) bear watching for year-over-year decreases in occupancy as they are highly-invested in life sciences office space. Alexandria’s occupancy levels have remained fairly constant between 94.0% and 94.8% between 2020 and 2024. But Kilroy, which has made strong gains recently, has 25% of its portfolio in the Life Sciences space and has an overall office occupancy rate of 84.2%, down from 87% in 2023.

Takeaway: Historically, two things are for certain- Major life events such as COVID-19 will always increase the demand for certain products or services and companies clamoring to get in on the action will always overproduce the items needed to fulfill that void. But sooner or later, the demand changes and the same firms are left holding the bag. Investors should try to stay one step ahead of those companies.