Nasdaq Slides: Office and Healthcare REITs Benefit!

Invitation Homes Loses Suit: Must Pay $19.99 Million

July 26, 2024

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Happy Friday! This week, money continued to come out of tech and diversify into more value-oriented dividend stocks. Several REITs reported on Q2 earnings and the number of analyst beats to misses were about 3 to 1. Several REITs also upped their full-year FFO guidance.

In this issue, money flows into the office and diverse REITs, home sales fall by 5.4% but increased home prices offset interest rate declines, and Invitation Homes settles a lawsuit for $19.99 million.

PRESENTED BY EQUITYMULTIPLE

REIT ROUNDUP:

Equinix Inc (Nasdaq: EQIX) July 23, announced it will acquire three high-performance data centers in the Philippines that will close in the second half of 2024. No purchase price was released except to note that it’s an all-cash transaction that represents a multiple of approximately 15x the projected EBITDA at full utilization.

Dynex Capital Inc (NYSE: DX) July 22, announced that Smriti Laxman Popence has been named to an additional post of Co-CEO and it will promote Chief Finance Officer (CFO) Rob Colligan to an additional position of Chief Operating Officer (COO).

Four Corners Property Trust Inc (NYSE: FCPT) July 18, announced the acquisition of a Buffalo Wild Wings property in Texas for $2.5 million. The property is net-leased to an existing tenant.

Upgrades:

EastGroup Properties Inc (NYSE: EGP) July 22, Wedbush analyst Richard Anderson upgraded EastGroup Properties from Neutral to Outperform and raised the price target 28% from $162 to $208.

Stag Industrial Inc (NYSE: STAG) July 22, Wedbush analyst Richard Anderson upgraded Stag Industrial from Neutral to Outperform and raised the price target 28% from $38 to $44.

Equinix Inc: July 23, Wells Fargo analyst Eric Luebchow upgraded Equinix from Equal-Weight to Overweight and raised the price target from $825 to $875.

Invitation Homes Inc (NYSE: INVH) July 24, Wells Fargo analyst Eric Luebchow upgraded Invitation Homes from Equal-Weight to Overweight and raised the price target from $825 to $875.

…and Downgrades

Host Hotels & Resorts Inc (Nasdaq: HST) July 19, JP Morgan analyst Joseph Graff downgraded Host Hotels from Neutral to Underweight and lowered the price target from $20 to $18.

AGNC Investment Corp (Nasdaq: AGNC) July 24, Maxim Group analyst Michael Diana downgraded GNC Investment from Buy to Hold.

Alexandria Real Estate Equities Inc (NYSE: ARE) July 24, Wedbush analyst Richard Anderson downgraded Alexandria Real Estate from Outperform to Neutral and reduced the price target from $140 to $130. 

Q2 Earnings News:

WINNERS & LOSERS

📈Biggest Winners This Week: Office and Healthcare REITs

📉 Biggest Losers This Week: Some Mortgage and Specialty REITs

ONE BIG THING

Stock Market Nft GIF by Pudgy Penguins

Nasdaq Slides: Money Flows into Office and Healthcare REITs

What: This week the Nasdaq continued falling from its high of 18,671 set on July 11 and investors were putting money into value-oriented stocks such as REITs. Office and Healthcare REITs were two subsectors showing the most strength among all REITs.

Who: As of Thursday morning, four of the leading 10 REITs were from the office sub-sector. They were Net Lease Office Properties (NYSE: NLOP), Creative Media & Community Trust Corp (Nasdaq: CMCT), Office Properties Income Trust (Nasdaq: OPI) and City Office REIT Inc (NYSE: CIO). Others showing strength were Piedmont Office Realty Trust, Inc. (NYSE: PDM) and Highwoods Properties Inc (NYSE: HIW).

Healthcare REITs also saw increased investor interest. Some of the better performers were Medical Properties Trust Inc (NYSE: MPW), Diversified Healthcare Trust (Nasdaq: DHC), Welltower Inc (NYSE: WELL), and National Health Investors Inc (NYSE: NHI).

Why: Weaker than expected results for Tesla Inc (Nasdaq: TSLA) and a decline in Alphabet Inc Class A’s (Nasdaq: GOOGL) YouTube advertising revenue weighed heavily on the Nasdaq on Wednesday, continuing a decline that’s been ongoing over the past two weeks.

Investors are looking again at defensive income stocks as safe havens until this Nasdaq correction plays out. Office and Healthcare REITs have shown significant strength over the last month as investors continually look to the FED to begin reducing interest rates at its September meeting.

Many REITs continue to pay strong dividend yields, even as their prices rise. Medical Properties Trust gained 28% since July 1, yet its dividend yield is still over 11%.

Takeaway: Nothing goes up or down forever and the large-cap tech stocks were long overdue for a correction. Tesla dropped over 12% on Wednesday following its earnings report. Meanwhile, Office and Healthcare REITs are finally returning to their 2022 levels.

REIT investors, you’ve waited patiently for a long time for share prices to rebound and now they are. Collecting or reinvesting the dividends while you wait helps keep losses down and when REITs appreciate, that’s the icing on the cake.

Selling Season 1 GIF by The Roku Channel

U.S. Existing Home Sales Drop 5.4% In June

What: On July 23, the National Association of Realtors (NAR) announced that U.S. existing home sales declined by 5.4% year-over-year in June, while median home prices were hitting new record highs of $426,900. Sales came in at an annual rate of 3.89 million, below the 3.99 million expected by economists.

How: The median price increase was the 12th consecutive monthly gain of year-over-year prices. However, the inventory of unsold existing homes rose 3.1% from the previous month to 1.32 million by the end of June. The level of home supply rose from 3.1 months a year ago to 4.1 in June.

Deja Vu?: This scenario is eerily similar to the one in 2006 when prices were still rising, even while sales were slowing. Interest rates were also high then. What eventually followed was a real estate crash of enormous proportions. However, there are some differences between 2006 and 2024:

  • In 2006, zero-down mortgages created a foreclosure crisis due to a lack of equity in the home. Today, substantial down payments and price appreciation put more “skin in the game” for homeowners.

  • In 2006, mortgage rates rose throughout the year, from 6.25% to 6.80% In 2024, mortgage rates have declined from 7.00% to 6.77% and should decline more if markets feel certain that the FED will cut interest rates in September.

  • The inventory of unsold homes in July 2006 was 3.89 million. In July 2024 it’s approximately 1.32 million. The smaller number of available homes should lend stability to prices.

Takeaway: The decline in sales shouldn’t come as a surprise. Interest rate declines are welcome, but as median sale prices continue to rise, it becomes more difficult for younger generations to afford a home in many states. Take this example, using a popular loan type that requires a smaller down payment:

An FHA 3.5% down payment on a $400,000 home is $14,000 and the Principal, interest, taxes, and insurance (PITI) with a 7.00% 30-year mortgage is $2,974 monthly. However, if the home price rises to $426,000, the borrower needs $14,910 down and the monthly PITI climbs to $3,163. A decline in interest rates to 6.75% brings the total PITI a little lower to $3,094, but that’s still $120 more than the 7.0% interest rate on the $400,000 home.

In other words, don’t listen to the chatter about falling interest rates, if you want to know if homes are becoming more or less affordable, focus on the median price of homes.

PRESENTED BY EQUITYMULTIPLE

ONE FOR THE ROAD

Stop No GIF by The Tonight Show Starring Jimmy Fallon

Invitation Homes Loses Qui Tam Action, Must Pay $19.99 Million In Fines

What: Invitation Homes Inc (NYSE: INVH) On July 22, Invitation Homes announced it reached an agreement with 35 California cities to settle a California “Qui Tam” action. Qui tam is a civil suit that enables a private citizen to sue a company or person on behalf of the U.S. to recover fraudulently obtained money.

The complaint, filed under the California False Claims Act, alleged that Invitation Homes’ contractors performed home improvements without pulling required building permits. Invitation Homes maintained that the complaint was without merit, but decided the settlement was in the best interest of its shareholders and for company operations. Under the terms of the agreement, Invitation Homes will pay a total of $19,992,900 to completely resolve the dispute and release the company without any admission of liability.

WHO: Invitation Homes is a Dallas, TX-based Residential REIT that purchases higher-quality single-family homes and then leases or lease-purchases them to higher-income tenants. Invitation Homes owns nearly 80,000 homes for lease in desirable neighborhoods across the U.S. and is now the largest owner/landlord of single-family homes in the U.S. It targets communities with strong rental demand where purchasing homes is difficult because of high prices and a lack of inventory. Over the past few years, it has partnered with homebuilders to build new home rental communities.

WHY: Permit requirements vary from state to state, but in California, according to the California Building Standard Codes, “no building structure may be erected, constructed, enlarged, altered, repaired, moved, improved, removed, converted or demolished without a separate permit for each building or structure has first been obtained from the building official.”

Takeaway: This is the second time in 2024 that Invitation Homes has sparred with the state of California. In January, Invitation reached a settlement to resolve allegations that it violated the California Tenant Protection Act (TPA) and California’s price-gouging law by increasing rents unlawfully on some 1900 homes. That cost Invitation $2.04 million in civil penalties, plus another $1.68 million to credit tenants all amounts collected above state rent caps, plus 5% interest.

One could say that the “Golden State” has been anything but golden for Invitation Homes this year.

Update: On July 24, Deutsche Bank analyst Derek Johnston upgraded Invitation Homes from Hold to Buy and increased his price target from $35 to $41. After the bell, Invitation Homes reported its Q2 operating results. FFO of $0.47 was in line with expectations and was three cents better than Q2 2023, but revenue of $653.45 million was just shy of the consensus view of $654.70 million. Still, revenue was ahead of Q2 2023 revenue by 8.84%.

Invitation Homes also raised the midpoint of its full-year 2024 Core FFO per share from $1.86 to $1.87. But the lawsuit weighed heavily on Invitation Homes shares this week, losing over 5.50%.

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