Happy Friday! Investors received some good news on the inflation front this week, boosting REITs and other stocks. First, the NY Fed’s Survey of Consumer Expectations put the 3-year inflation outlook at 2.3%, the lowest number going back to June 2013.

On Tuesday, the July Producer Price Index came in at 0.1%, below the expected increase of 0.2%. And on Wednesday, the Consumer Price Index (CPI) met the forecasts of a 0.2% increase. Investors breathed a sigh of relief because it means the FED is likely to lower interest rates when it meets in September.

On Thursday, there was more good news. Retail sales numbers were up 1% in July, allaying Wall Street’s fears of recession. The expectation was for a gain of 0.3%.

The Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was 1% higher for the week.

In this issue, The nightmare of three years of inflation for REITs may be ending, Should you wait on refinancing that mortgage? And American Healthcare REIT is a newer issue that’s blasting up the charts.

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REIT ROUNDUP:

Gladstone Commercial Corporation (Nasdaq: GOOD) August 8, announced that on August 7, it sold two medical office properties in Atlanta leased to Northside Hospital. No price was given, but the sale was part of an 8-property portfolio purchased in 2007.

Phillips Edison & Co Inc (Nasdaq: PECO) August 8, announced that S&P Global Ratings has upgraded its credit rating for Phillips Edison and its operating partnership, Phillips Edison Grocery Center Operating Partnership I L.P. from BBB with a stable outlook to BBB.

Upgrades:

First Industrial Realty Trust Inc (NYSE: FR) On August 13, Wolfe Research analyst Andrew Rosavich upgraded First Industrial Realty Trust from Peer Perform to Outperform and announced a $64 price target.

Camden Property Trust (NYSE: CPT) On August 12, Bank of America Securities analyst Joshua Dennerlein upgraded Camden Property Trust from Underperform to Buy and raised the price target 32.4% from $111 to $147.

Mid-America Apartment Communities Inc (NYSE: MAA) On August 12, Bank of America Securities analyst Joshua Dennerlein upgraded Mid-America Apartment Communities from Underperform to Buy and raised the price target 31.2% from $144 to $189.

Vornado Realty Trust (NYSE: VNO) On August 8, Piper Sandler analyst Alexander Goldfarb upgraded Vornado Realty from Underweight to Neutral and raised the price target 36.3% from $22 to $30. On the same day, BMO Capital analyst John Kim also upgraded Vornado Realty from Underweight to Neutral and raised the price target 37.9% from $29 to $40.

…and Downgrades:

Prologis Inc (NYSE: PLD) Bank of America Securities analyst Jeffrey Spector downgraded Prologis from Buy to Neutral and announced a price target of $128.

Hudson Pacific Properties Inc (NYSE: HPP) On August 8, Hudson Pacific Properties received two separate downgrades. Piper Sandler analyst Alexander Goldfarb downgraded Hudson from Overweight to Neutral and lowered the price target from $7 to $6. John Kim also downgraded Hudson from Outperform to Market Perform and lowered the price target from $8 to $6.

On August 14, Wolfe Research analyst Andrew Rosivach downgraded Hudson Pacific Properties from Outperform to Peer Perform.

Second-Quarter 2024 Earnings News:

The number of REIT earnings reports this week diminished significantly from our previous two newsletters. Here are the best reports of the week:

Sotherly Hotels Inc (Nasdaq: SOHO) August 13, AFFO of $0.38 beat the consensus estimate of $0.34 and topped Q2 2023 AFFO of $0.36. Revenue of $50.69 million was in line with estimates and increased from revenue of $49.02 million in Q2 2023.

BRT Apartments Corp (NYSE: BRT) August 9, FFO of $0.35 per share beat the consensus estimate of $0.28 but was below FFO of $0.35 per share in Q2 2023. Revenue of $23.86 million topped estimates of $23.60 million and bested the year ago same quarter revenue of $23.32 million.

Insider Transactions:

WP Carey Inc (NYSE: WPC) On August 12, Director Mark Alexander purchased 3,500 shares of common stock, a total transaction of $195,530.

Brixmor Property Group Inc (NYSE: BRX) On August 12, Director Michael B. Berman sold 10,000 shares of company stock at an average price of $25.17 for a total of $251,700.

WINNERS & LOSERS

📈 Biggest Winners This Week:

• American Healthcare REIT Inc (NYSE: AHR) Up 9.63%. (See Story on “One For The Road”)

• BrightSpire Capital Inc (NYSE: BRSP) Up 8.51%

• Medalist Diversified REIT Inc (Nasdaq: MDRR) Up 7.21%

• Brandywine Realty Trust (NYSE: BDN) Up 6.05%

• Outfront Media Inc (NYSE: OUT) Up 5.92%

• Indus Realty Trust Inc (Nasdaq: INDT) Up 5.22%

• Veris Residential Inc (NYSE: VRE) Up 4.85%

• Highwoods Properties Inc (NYSE: HIW) Up 4.72%

📉 Biggest Losers This Week:

• Seritage Growth Properties Class A (NYSE: SRG) Down 7.94%

• Service Properties Trust (Nasdaq: SVC) Down 6.07%

• DigitalBridge Group Inc (NYSE: DBRG) Down 5.45%

• Uniti Group Inc (Nasdaq: UNIT) Down 4.73%

• Claros Mortgage Trust Inc (NYSE: CMTG) Down 4.52%

• Americold Realty Trust Inc (NYSE: COLD) Down 3.72%

• Community Healthcare Trust Inc (NYSE: CHCT) Down 3.43%

ONE BIG THING

Is the Inflation Nightmare Nearing An End For REITs?

What: On Tuesday, the July Producer Price Index came in at 0.1%, below the expected increase of 0.2%. Then on Wednesday, the July Consumer Price Index (CPI) met the forecasts of a 0.2% increase month-over-month. The year-over-year consumer price increase of 2.9% was the lowest reading since 2021.

Why: Although the y-o-y number is still far from the FED’s target goal of 2%, with the labor force weakening, the FED is likely to lower interest rates when it meets in September. Whether that cut will be 25 or 50 basis points is now the subject of much debate.

Inflation has been a nightmare for consumers since 2021 and a harsh dose of reality for many REIT investors. Although the effect of higher interest rates has not been as terrible for REITs as Wall Street had predicted, about 70% of all REITs are still trading below their share price at the start of 2022.

The chart below shows well-known and popular REITs from many different sub-sectors and their prices on January 1, 2022, versus August 14, 2024. All of them are down substantially from the start of 2022, although the loss percentages do not include dividends paid:

Takeaway: 

The worst should now be over for REITs. Lower interest rates will help with refinancing existing loans and with new purchases. If inflation continues trending lower it will help keep residential and industrial property maintenance and insurance costs down. Hotels may see an increase in business and personal travel. Retail occupancy rates may stabilize and consumers will have more spendable income for shopping and experiential activities.

Wall Street has been anticipating lower PPI and CPI numbers and a FED rate cut for some time, so REITs have been strong gainers over the past month or two. Therefore, REIT performances were somewhat modest this week, even with the good index reports.

Some may feel it’s too late to get into REITs now, that the best opportunities were a few months ago. But the table above helps keep things in perspective. Another thing to consider is that most REITs are paying out higher dividends today than they were at the start of 2022.

Sleep well, fellow REIT investors, your inflation nightmare may be nearing an end.

Does It Pay To Refinance Your Mortgage Yet?

What: The Mortgage Bankers Association’s refinance index was up 16% last week from the previous week and was at the highest level in two years. The average 30-year loan last week fell to 6.47%, the lowest level in over a year. But does it pay to refinance now, as opposed to waiting for even lower rates?

When: The 30-year loan reached a 23-year high of 7.79% in October 2023. However, home sales also hit an annual low that month. So, there are not many homebuyers who took a 7.79% mortgage. That means that most of the people refinancing a loan today have an interest rate below that. But let’s use that 7.79% number to calculate the savings from refinancing because that will show the most that can be saved.

How: On a $400,000 loan with a 7.79% mortgage, the Principal and Interest (P&I) payment is $2,877 a month. If one refinances that amount at 6.47%, the monthly cost drops $357 to $2,520. That sounds great, right? But now one has to factor in the closing costs. According to Freddie Mac, closing costs on a $400,000 refinance would be $10,012. Therefore, it will take approximately 28 months before one breaks even on the refinance. After that, it’s all savings.

But don’t forget, almost a year of P&I payments has already been made and now the borrower has to start anew with another 30-year term. Along with closing costs, that’s another minor detail that Realtors and Mortgage companies don’t like to bring up when they say, “You can always refinance”, trying to convince someone to buy a home during a high interest rate period.

Given the likelihood of upcoming interest rate cuts in 2024, waiting a few more months to refinance seems prudent. If the 30-year loan declines to 5.75%, the monthly P&I drops to $2,334, a savings of $543 per month. The closing costs are the same, however, the break-even point would decline to 18.4 months.

Takeaway: Here’s one more option, and while it might seem difficult, it can save the borrower an incredible amount of money in the long term. The trick is to refinance a high-interest 30-year loan onto a 15-year loan with a much lower interest rate. 15-year loans are typically .50% to .75% below the 30-year loan. The latest national average rate of a 15-year loan is 5.99%, but what if it drops to 5% within a few months?

At 5.00%, the 15-year loan on $400,000 would cost $3,163 a month, but that’s only $286 monthly more than the 30-year payment at $7.79%. However, by paying off the mortgage over 15 years, the borrower saves $466,245 in total lifetime payments! And the closing costs are $9,767, a savings of $245 compared to the 30-year refinance.

Imagine the investments one could make with $466,490, instead of spending it on a mortgage.

ONE FOR THE ROAD

American Healthcare REIT: A Newbie Winner!

Who: American Healthcare REIT Inc (NYSE: AHR) is an Irvine, CA-based self-managed Healthcare REIT that acquires, owns and operates a diversified portfolio of 318 properties across 36 states and the U.K. It has 19.45 million square feet under management and a market cap of $2.38 billion.

Its portfolio includes clinical healthcare properties, primarily medical office buildings, senior housing, skilled nursing facilities, hospitals and other healthcare-related facilities. American Healthcare was formed in 2021 with the merger of Griffin-American Healthcare REIT III, Griffin-American Healthcare REIT IV and American Healthcare Investors. It launched its IPO on January 29, 2024.

Why: American Healthcare Investors has performed extremely well in recent months. Since April 15, American Healthcare has produced a total return of 38.11%. Its total return since the IPO is 40.32%. On August 14 it touched a new high of $18.14 before closing at $18.05.

On August 5, American Healthcare reported first-quarter operating results, beating the estimates on Q2 FFO, $0.33 to $0.28, but came up $3.52 million shy of the revenue estimate of $504.58 million. American Healthcare beat the street estimates on FFO and revenue in its previous quarterly report in May.

American Healthcare’s first two quarterly dividend payments were $0.25 per share. The annualized $1.00 dividend yields 5.83%. The forward payout ratio is still a bit high at 84.03% so investors should not expect any dividend increases until FFO increases over a few more quarters.

American Healthcare also has the advantage of being in a recently strong sub-sector. After several years of low occupancy, Senior facilities are returning to pre-COVID levels.

One caveat of note- the present short interest of 8.20% is high. Perhaps investors are anticipating a pullback after such a strong price run-up. The technical indicators such as 14-period RSI and Stochastics suggest the stock may be overbought so looking for an entry point on a pullback or dollar cost averaging into a position may be prudent.

Takeaway: American Healthcare has done well since its IPO and the future is much brighter for Healthcare REITs than a few years ago. America has an aging population so occupancy in these facilities should remain strong for many years. One risk is new government regulations on medical properties that could add to capex and increase the payout ratio. But for now, American Healthcare is looking very attractive.

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