Could mREITs Be The Best Performing REITs of 2024?

Plus, How To Profit Off Short Seller Reports

Author

Ethan Roberts
March 29, 2024

Happy Friday! It was a much more subdued and welcoming week, following last week’s obsessive FED watching, with REITs performing better overall.10 REITs were upgraded, while only four were downgraded (see below).

In economic news, consumer confidence held fairly steady, declining from 104.8 to 104.7 from February to March. The stock market is closed on Good Friday. The bond market is open but closes at 2 PM.

In This Issue: Mortgage REITs have been showing strength in anticipation of FED cuts, three ways to buy a home with next to nothing out of pocket and how to profit off negative short seller reports.

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:

Boston Properties, Inc. (NYSE: BXP) March 25, announced it has completed the sale of a 45% interest in a life science building in Cambridge, MA to Norges Bank Investment Management.

Terreno Realty Corp (NYSE: TRNO) March 25, announced it has acquired a vacant 24,000 square foot industrial property on 0.7 acres in Brooklyn, NY for $12.0 million.

Essex Property Trust Inc (NYSE: ESS) March 25, announced it has acquired its joint venture partner’s 49.9% interest in four communities of 1,480 apartment homes for a total purchase price of $505.0 million.

Four Corners Property Trust Inc (NYSE: FCPT) March 26, announced it’s purchased a Heartland Dental Property in Alabama for $2 million. The deal was priced at a 7.7% cap rate, excluding transaction costs.

Apple Hospitality REIT Inc (NYSE: APLE) March 27, announced it’s purchased AC Hotel by Marriott Washington, DC Convention Center for $116.80 million.

Medical Properties Trust Inc (NYSE: MPW) March 27, announced that Steward Health Care has made a deal to sell its nationwide physician network to UnitedHealth’s Optum Care Unit. 

INSIDER PURCHASES:

BRT Apartments Corp (NYSE: BRT) March 25, Gould Investors LP, a 10% owner of BRT Apartments, bought a total of 3,471 shares at an average price of $16.26, for an approximate total of $56,450.

WINNERS & LOSERS

📈 Biggest Winners This Week: Healthcare and Self-Storage REITs

  • Creative Media & Community Trust Co (NYSE: CMCT) Up 15.90%

  • Medical Properties Trust Inc (NYSE: MPW) Up 9.86%

  • Industrial Logistics Property Trust (Nasdaq: ILPT) Up 5.54%

  • Apartment Investment and Management (NYSE: AIV) Up 4.99%

  • Sotherly Hotels Inc (Nasdaq: SOHO) Up 4.90%

  • Hannon Armstrong Sustnbl Infrstr (NYSE:HASI) Up 4.74%

  • Healthpeak Properties Inc (NYSE: DOC) Up 4.71%

  • Healthcare Realty Trust Inc (NYSE: HR) Up 4.34% 

📉 Biggest Losers This Week: Office REITs

  • Office Properties Income Trust (Nasdaq: OPI) Down7.83%

  • Uniti Group Inc (Nasdaq: UNIT) Down 7.24%

  • Diversified Healthcare Trust (Nasdaq: DHC) Down 6.87%

  • JBG SMITH Properties (NYSE: JBGS) Down 5.85%

  • Hudson Pacific Properties Inc (NYSE: HPP) Down 5.16%

Upgrades:

Macerich Co (NYSE: MAC) March 22, Citigroup analyst Nicholas Joseph upgraded Macerich from Sell to Neutral and raised the price target from $8 to $17.

Omega Healthcare Investors Inc (NYSE: OHI) March 22, Citigroup analyst Nicholas Joseph upgraded Omega Healthcare from Neutral to Buy and raised the price target from $32 to $35.

Essential Properties Realty Trust Inc (NYSE: EPRT) March 22, Citigroup analyst Nicholas Joseph upgraded Essential Properties from Neutral to Buy and raised the price target from $25 to $28.50.

American Homes 4 Rent Class A (NYSE: AMH) March 22, Citigroup analyst Nicholas Joseph upgraded American Homes 4 Sale from Neutral to Buy and raised the price target from $37 to $41.

Park Hotels & Resorts Inc (NYSE: PK) March 22, Citigroup analyst Smedes Rose upgraded Park Hotels & Resorts from Neutral to Buy and raised the price target from $14 to $20.

Tanger Inc (NYSE: SKT) March 22, Citigroup analyst Michael Bilerman upgraded Tanger from Neutral to Buy and raised the price target from $30 to $33.

SL Green Realty Corp (NYSE: SLG) March 27, Barclays analyst Anthony Powell upgraded SL Green Realty from Underweight to Equal-Weight and raised the price target from $35 to $48.

Kimco Realty Corp (NYSE: KIM) March 27, announced it has disposed of 10 former RPT Realty properties for an aggregate price of $248 million because they did not fit with Kimco’s long-term investment goals. Kimco has now achieved its 2024 disposition target for former RPT properties.

Public Storage (NYSE: PSA) March 28, Raymond James analyst Jonathan Hughes upgraded Public Storage from Market Perform to Strong Buy and announced a $330 price target.

Vornado Realty Trust (NYSE: VNO) March 28, Morgan Stanley analyst Ronald Kamdem upgraded Vornado Realty from Underweight to Equal-Weight and raised the price target from $24 to $26.

… and Downgrades:

Invitation Homes Inc (NYSE: INVH) March 22, Citigroup analyst Nicholas Joseph downgraded Invitation Homes from Buy to Neutral and announced a $39 price target.

Kimco Realty: March 22, Citigroup analyst Michael Bilerman downgraded Kimco Realty from Buy to Neutral and lowered the price target from $26 to $20.

Pebblebrook Hotel Trust (NYSE: PEB) March 28, Compass Point analyst Floris Van Dijkum downgraded Pebblebrook Hotel from Buy to Neutral and announced a $17 price target.

Extra Space Storage Inc (NYSE: EXR) March 28, Raymond James analyst Jonathan Hughes downgraded Extra Space Storage from Strong Buy to Outperform and maintained a $160 price target.

Earnings News:

Creative Media & Community Trust Corp (Nasdaq: CMCT) March 27, FFO of $(0.72) per share, missed the estimate of $(0.48) by 50% and was 84.62% below Q4 2022 FFO of $(0.39) per share. Revenue of $29.47 million missed the estimate of $30.20 million but was a 13.92% increase over revenue of $25.87 million in Q4 2022.

ONE BIG THING

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Could Mortgage REITs Be The Best Performing REITs of 2024?

What: Since May 2023, Mortgage REITs (mREITs) have been on the upswing, outperforming many other REITs across other sub sectors and three of the top eight REITs year-to-date (YTD) are mREITs.

Who: The top three performing mREITs YTD are: Acres Commercial Realty Corp (NYSE: ACR), up 38.96%, TPG RE Finance Trust Inc (NYSE: TRTX), up 17.69% and Sachem Capital Corp (NYSE: SACH), up 17.11%. Many mREITs began rallying in November 2023, but some like Sachem touched their lows at the end of May. Sachem is up about 70% since then.

Several other mREITs have also seen tremendous gains since early May 2023:

Why: One reason these REITs have performed so well is because they were so oversold from inflation and successive interest rate hikes. The cessation of those hikes and FED assurances that they will begin to cut rates in 2024 are now lifting them from those oversold positions. Wall Street always looks ahead and so the very interest sensitive mREITs have been benefiting enormously from each hint of a rate cut the market sees.

Takeaway: Out of 43 mREITs, only about half have seen gains over the past year, and only 14 are positive year-to-date. This means that investors still have to be selective about which mREITs they purchase. Allocating a certain amount of money and then buying several mREITs in a basket is one way to reduce risk, along with dollar cost averaging. The mREITs listed above would be a good place to start.

Investors should also realize that these REITs are quite volatile and that each new CPI or PPI reading that hints at the direction of interest rates will impact heavily upon mREIT prices. Be careful to avoid mREITs with negative earnings or payout ratios above 90%. But if the FED does follow through on its intentions, mREITs stand to benefit as much or more than any other REIT sector.

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Housing Market Picks Up: 3 Ways To Buy A Home With Virtually No Money Out Of Pocket

What: This week, NAR reported that February existing-home sales rose 9.5% from January, the largest monthly increase in a year. Sales climbed in the West, South and Midwest, but were unchanged in the Northeast. But year-over-year, sales declined by 3.3%. A slight increase in housing supply was cited as a possible reason for the rise in sales, along with a small decline in mortgage rates.

How: Freddie Mac says the 30-year fixed rate Conventional mortgage averaged 6.74% on March 14, down from 6.88% the previous week. Bankrate.com, in its weekly survey of the largest U.S. mortgage brokers, says that on March 25, the national average 30-year mortgage APR is 7.03%. APR includes fees in closing costs and mortgage points.

Despite the sales increase, many young potential homebuyers continue to shy away from expensive home prices and high interest rates. Coupled with an inability to save for a large down payment and closing costs, these remain the largest obstacles to younger workers buying homes. The minimum down payment for an FHA loan is 3.5% and for a Conventional loan it’s 5%. Closing costs can range from 3% to 6% of the loan balance. But here are three ways to buy a home with virtually no money out of pocket:

  • VA Loan: Most Veterans of the Armed Forces and some veterans of the National Guard and Reserves are eligible for zero-down VA Loans. A funding fee of 2.15% of the loan amount is charged, but the amount can be rolled into the mortgage rather than paid up front.

  • USDA Loan: A zero-down mortgage for buying a home in eligible small towns and rural areas. The USDA loan program is a part of the Department of Agriculture. The USDA loan can also be significantly lower than a Conventional loan. Plus, there is no private mortgage insurance (PMI) with a USDA loan. There is, however, an upfront fee of 1% and an annual fee of 0.35% of the loan balance, which is amortized across monthly payments. A credit score of 640 or better is required.

  • Ask Sellers to pay buyer closing costs: Typically, home listing prices are a couple of percentage points above the amount for which the home ultimately sells. In other words, a home listed for $400,000 might normally sell for about $388,000, or 97% of list price. In a slow market, the percentage of sales price to list price may be even less.

    But in many cases, a buyer can offer the seller the full list price, yet ask the seller to pay for most or all of the buyer’s closing costs. In the above example, the house would sell for $400,000, and the seller would pay for $12,000 of the buyer’s closing costs.

Takeaway: Any time a home is bought with zero down or at an increased price, the monthly mortgage payment will be larger than if a sizable down payment was made. And rolling a funding fee into the mortgage also raises the monthly payment. So these methods work best for people who have sufficient income, but just lack enough savings for down payments and/or closing costs.

A good mortgage broker can help determine if one qualifies for a VA or USDA loan, and keep in mind that a house must appraise for the list price in order to ask the seller for closing cost concessions.

ONE FOR THE ROAD

How To Profit Off Short Selling Reports

What: Last week we published a story about Hindenburg Research announcing a new short position on Equinix Inc (Nasdaq: EQIX), while calling out Equinix for selling its shareholders an “AI Pipedream”. But even more damaging was the claim that Equinix was manipulating its quarterly reports to make it seem like ordinary maintenance costs were actually spending on growth costs, thus boosting the appearance of profitability.

Since the Hindenburg report ran, Equinix’ shares have fallen from $844.58 to a recent price of $823, with the shares trading near $785 on Monday.

How: So how can investors save principal or even profit after a hedge fund or investment first announces a big short position and/or damaging, but unverified information on a company?

  • Sell the stock at a reduced price as soon as the news is released to avoid any further losses.

  • Continue to hold the stock and ignore the shorting

  • Purchase more of the stock at a substantial discount to the previous price

A few other recent cases where short selling reports led to a REIT’s decline are notable. On January 5, 2024, Hedgeye Risk Management released a report that it was shorting EPR Properties (NYSE: EPR), based upon EPR’s cost of capital becoming higher than its unlevered cash-on-cash return and speculations about tenant defaults, rent reductions and theater tenant restructuring. At the time, EPR was trading around $47. Most recently, EPR was trading near $42.

On December 6, 2023, Muddy Waters Research announced it was shorting Blackstone Mortgage Trust Inc (NYSE: BXMT) with a scary report entitled, “Here Comes the Cliff”. The report says that Blackstone will have $16 billion of interest rate swaps that terminate soon and that a large number of borrowers will likely be unable to refinance or pay. The losses to Blackstone Mortgage will necessitate a dividend cut.

Blackstone closed at $21.88 the day before the report came out, but dropped to $19.72 within two days after the release. Yet, within a few weeks it touched a high of $22.65 before pulling back. This week it was trading near$19.75.

Arbor Realty Trust Inc (NYSE: ABR) has suffered twice at the hands of the same short seller. In November, 2023, the share price fell over 12% from $12.98 to $11.39 after Viceroy Research criticized Arbor for making “high-risk” multifamily bridge loans with short term, floating rate debt. Many of these loans were made when interest rates were much lower and Viceroy said Arbor will soon be vulnerable to a wave of defaults. Viceroy termed its report, “Arbor Realty Trust-Slumlord Millionaires”.

Then, in December, Viceroy said it had received information from a “whistleblower” that Arbor may have concealed distressed deals and other underlying assets. The report concludes, “We believe Arbor is a donut. $0.00.”

Interestingly, Arbor rebounded from its November pounding to touch $15.82 by year’s end. Recently, it was trading at $13.39 after falling to $11.52 by the end of February.

Takeaway: What can we learn from these examples?

  1. The shorting firm likely takes its position prior to the report’s release and seems to have a knack for airing its report just as the stock is technically extended, or “overbought”, which of course augments the decline.

  2. If you sell immediately after a short report is released, you will most likely avoid further short-term losses.

  3. If you hold the stock, your losses will increase initially, but eventually the stock will probably rebound and maybe even reach a price higher than it was prior to the report’s release.

  4. Investors who buy more shares after a large price decline from a short report often earn a nice profit and gain a higher dividend yield.

Equinix is a case in point for number four. An investor who bought near last Monday’s lows near $785 would already be up almost 5% in just a few days.

Of course, it takes courage to step in and buy after a large decline, and investors would be wise to put stop loss orders into place on any purchases. But the short sellers profit off investor fears, and so can you if you are patient enough to wait one or two weeks, rather than buying the initial downturn.

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.