Happy Friday! Sell in May and Go Away? Not so far! On Thursday, the Labor Department reported that initial filings for unemployment benefits rose 22,000 from last week to reach 231,000, above the Dow Jones estimate for 214,000 and the highest level since August 2023. But bad news was good news for Wall Street since a weaker jobs market bolsters hopes for interest rate cuts. Stocks, including REITs, continued their rally from the previous few days. This week, the Vanguard Real Estate Index Fund ETF (NYSE: VNQ) was about 2.30% higher.

In This Issue: Realty Income beats estimates but goes nowhere, Hotel REITs try to get their act together after a long bear market, and home sellers need to carefully consider the ramifications of the recent court decision regarding buyer agent commissions.

REIT ON!

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:

Terreno Realty Corp (NYSE: TRNO) May 2, announced it acquired a portfolio of 28 industrial buildings located in New York City, Northern New Jersey, San Francisco and Los Angeles for a price of approximately $364.50 million. The total square footage of the properties was 1.2 million and is 91.6% leased to 70 tenants.

Uniti Group Inc (Nasdaq: UNIT) May 3, announced a merger with Windstream Holdings II, LLC, in a deal that gives Uniti shareholders 62% and Windstream shareholders 38% of the outstanding common equity of the combined company. Uniti is a national wholesale fiber network and Windstream, Uniti’s current tenant, is a fiber-to-the-home business.

Uniti also announced plans for a $300 million offering of 10.50% Senior Secured by its subsidiaries, with notes due in 2028, subject to regulatory approval. Proceeds may be used to fund the merger with Windstream instead of the bridge loan facility that is now in place.

Alexander’s, Inc. (NYSE: ALX) May 6, announced it has extended its NYC lease with Bloomberg L.P. by 11 years, beginning at the expiration of the existing lease in 2029.

Healthcare Realty Trust Inc (NYSE: HR) May 6, announced it’s entered into a strategic joint venture with finance company KKR & Co Inc (NYSE: KKR) to jointly own and invest in medical outpatient buildings. Healthcare Realty will receive approximately $300 million for additional acquisitions and will contribute 12 of its existing properties to the joint venture at a value of $382.50 million while retaining a 20% interest in them. KKR has also committed up to $600 million to the joint venture for additional acquisitions or other assets.

Medical Properties Trust Inc (NYSE: MPW) May 7, announced that its largest tenant, Steward Health Care has gone into Chapter 11 bankruptcy. The state of Massachusetts is actively seeking new owners for Steward hospitals to stabilize the hospitals that Steward formerly operated. MPW says it has approved funding of $75 million in Debtor-In-Possession Financing to Steward, “to ensure continuity of patient care while accelerating the re-tenanting of hospitals to new operators.”

Global Self Storage Inc (Nasdaq: SELF) May 7, announced that Etude Storage Partners LLC, an investment firm, sent a letter to Global’s Board of Directors, seeking to purchase Global at $6.15 per share, a 47% premium to its closing price on May 6.

Healthpeak Properties Inc (NYSE: DOC) May 7, announced it’s acquired King Street Properties’ minority interest in joint ventures for eight lab buildings in Cambridge and Lexington, MA.

WINNERS & LOSERS

📈 Biggest Winners This Week:

• Hannon Armstrong Sustnbl Infrstr Cap Inc (NYSE: HASI) Up 23.95%

• Global Self Storage Inc (NYSE SELF)  Up 23.15%

• Macerich Co (NYSE: MAC) Up 12.68%

• Equinix Inc (Nasdaq: EQIX) Up 9.74%

• Gladstone Commercial Corporation (Nasdaq: GOOD) Up 9.11%

• TPG RE Finance Trust Inc (NYSE TRTX) Up 6.89%

• Alexander’s, Inc. (NYSE: ALX) Up 6.79%

• Armada Hoffler Properties Inc (NYSE: AHH) Up 6.62%

📉 Biggest Losers This Week:

• Uniti Group Inc (Nasdaq: UNIT) Down 34.33%

• Office Properties Income Trust (Nasdaq: OPI) Down 10.55%

• Medical Properties Trust Inc (NYSE: MPW) Down 9.50%

• Claros Mortgage Trust (NYSE: CMTG) Down 9.20%

• Geo Group Inc (NYSE: GEO) Down 8.54%

• Diversified Healthcare Trust (Nasdaq: DHC) Down 7.85%

• Outfront Media Inc (NYSE: OUT) Down 7.36%

• Vornado Realty Trust (NYSE: VNO) Down 6.61%

Prices as of May 9 at noon

Upgrades:

Healthpeak Properties (NYSE: DOC) May 3, Wedbush analyst Richard Anderson upgraded Healthpeak Properties from Neutral to Outperform. No price target was given.

Mid-America Apartment Communities Inc (NYSE: MAA) May 6, Wedbush analyst Richard Anderson upgraded Mid-America Apartment Communities from Neutral to Outperform and raised the price target from $135 to $154.

Camden Property Trust (NYSE: CPT) May 6, Piper Sandler analyst Alexander Goldfarb upgraded Camden Property Trust from Underweight to Neutral and raised the price target from $90 to $110.

Sunstone Hotel Investors Inc (NYSE: SHO) May 7, Compass Point analyst Floris Van Dijkum upgraded Sunstone Hotel from Sell to Neutral and raised the price target from $10 to $12.

and Downgrades…

Centerspace (NYSE: CSR) May 3, Compass Point analyst Merrill Ross downgraded Centerspace from Buy to Neutral and raised the price target from $65 to $68.

Uniti Group (NASDAQ: UNIT) May 6, Raymond James analyst Frank Louthan downgraded Uniti Group from Strong Buy to Outperform and lowered the price target from $8 to $6.

Notable Earnings:

The following table shows the earnings and revenue of many REITs that reported first-quarter operating results this week:

ONE BIG THING

Realty Income Beats Estimates: Wall Street Shrugs

What: On Monday, May 6, after the closing bell, Realty Income Corp (NYSE: O) reported its first-quarter 2024 operating results. FFO of $1.05 beat the consensus estimate of $1.04 per share. Revenue of $1.26 billion topped the analyst estimate of $1.10 billion. But more notably, Q1 2024 revenue was 33.4% above $865.71 million in the first quarter of 2023. Realty Income also reaffirmed its full-year 2024 AFFO guidance of $4.13-$4.21.

Who: Realty Income is a San Diego-based, triple-net lease REIT, with over 15,450 properties worldwide. The “Monthly Dividend Company”, as it calls itself, is a member of the S&P 500 and an S&P 500 Dividend Aristocrat, meaning it has paid and raised its dividends consistently for at least 25 years. Realty Income has increased its dividend for 106 consecutive months and 124 times since its IPO in 1994. 

Why: If Tesla Inc (Nasdaq: TSLA) or Netflix Inc (Nasdaq: NFLX) beat estimates in earnings and revenue, they would soar by 5% or more. But Wall Street just shrugged off Realty Income’s results. On Tuesday, Realty Income was down almost 1%.

Wall Street has believed for some time that Realty Income has become too large to continue to grow its business. Yet, last year it acquired an interest in the Villaggio Las Vegas and merged with Spirit Realty Capital in January 2024. President/CEO Sumit Roy noted that Realty Income completed $598 million of investment volume in Q1, at an initial weighted average cash yield of 7.8%.

Realty Income’s portfolio occupancy rate of 98.6% at the end of March was excellent and remained fairly steady year-over-year. Furthermore, it has an annualized adjusted free cash flow of approximately $825 million to continue making selective acquisitions as they arise.  

Takeaway: Like Rodney Dangerfield’s famous, “I don’t get no respect” line, Realty Income cannot seem to get the respect from Wall Street that it deserves. But Realty Income investors know better. They know they can count on that monthly dividend deposited into their account to pay regular ongoing bills. They’ve also come to expect a small, but consistent increase on that dividend to counter inflation.

In mid-2022, Realty Income’s share price was near $70 and the dividend yield was about 4%. Presently, investors can buy shares below $55 with a 5.62% dividend yield. The payout ratio is still a comfortable 72.9% and FFO and revenue are higher now than they were in 2022.

The bottom line: Realty Income is a consistent and ever-increasing money machine.

Selling A Home? Why It Pays To Pay A Commission

What: The recent court decision in which Home Seller Plaintiffs prevailed over the National Association of Realtors (NAR), mandates that a commission split for the sale of a home is no longer a fait accompli between a listing agent and buyer’s agent. It also forbids listing agents from advertising any commission split in the Multiple Listing Service (MLS) and mandates buyer agents to write up an agreement with the buyers before they show them any homes.

Who: This decision could either save home sellers thousands of dollars in commissions and/or enable them to lower the asking price of their home. The latter is the hope of the Biden administration, while the former was the original motivation for the lawsuit.

The new rules will go into effect this summer, so how should home sellers react to the changes that are about to take place?

At a minimum, they should still offer a partial commission to a buyer’s agent or other buyer compensation such as closing cost assistance.

Why: The median home price in the U.S. is now about $400,000, but there are substantial price differences depending upon the area of the country. Larger cities in states like CA, NY and MA have much higher prices. Unless a buyer qualifies for a zero-down VA or USDA loan, the smallest down payment possible is 3.5% with an FHA loan. On $400,000 that’s $14,000 and the loan amount will be $386,000. Closing costs typically run anywhere from 2%-5% of the loan amount. Using the midpoint or 3.5% of a $386,000 loan, that’s another $13,510. To that, add a home inspection and termite or radon inspection for another $500 or more. So the buyer needs at least $28,000 in cash by the closing.

Given the difficulties of saving that much, it’s unlikely buyers can afford another $4,000-$12,000 for a buyer’s agent commission.

Reducing the home price won’t help that much, as it doesn’t offset most of the substantial upfront costs that buyers need. If a seller drops the asking price by $10,000, the savings on a 3.5% down payment would only be $350 and the closing cost savings would be even less.

Yes, the buyer could work with the listing agent only to save on commission, but the listing agent represents the seller, and not all buyers trust the listing agent to represent them fairly. And what if the only offer on the house comes from a buyer who brings their agent to the deal?

Takeaway: The 2024 real estate market is fraught with difficulty. If a seller truly wants to sell their home quickly, the best way is by helping the buyer in whatever way is needed. Sellers can create a quid pro quo by offering to pay a portion or all of the buyer’s closing costs or the buyer agent’s commission. In return, the buyer should pay the full asking price or close to it for the home.

Of course, two things are necessary for this arrangement to take place. The house must appraise at or above the sales price and the buyer must qualify for the loan payment. Assuming those conditions are met, both parties can get what they want and need to close the transaction.

ONE FOR THE ROAD

Hotel REITs: The Long Journey Back

What: Four years after COVID-19 decimated the Hotel industry, Hotel REITs are improving, but are still not back to pre-COVID levels.

Who: The Hotel REIT sub-sector consists of 17 REITs. Over the past three years, only three of the 17 have had positive total returns (including dividends). They are Ryman Hospitality Properties Inc (NYSE: RHP), +13.71%, Host Hotels & Resorts Inc (Nasdaq: HST) +6.34% and Apple Hospitality REIT Inc (NYSE: APLE) +2.72%.

Over the past year, the results are somewhat better, with nine of the 17 in positive territory. However, many of those gains were made in the fourth quarter of 2023 but have subsequently been wiped out in 2024. Year-to-date, only Xenia Hotels & Resorts Inc (NYSE: XHR),  Park Hotels & Resorts Inc (NYSE: PK), and Braemar Hotels & Resorts (NYSE: BHR) are in the green.

How: On May 7, Compass Point analyst Floris Van Dijkum upgraded Sunstone Hotel Investors Inc (NYSE: SHO) from Sell to Neutral and raised the price target from $10 to $12. Before this, the last time a Hotel REIT received an upgrade was Park Hotels & Resorts on March 22.

Park Hotels has the strongest relative strength among the sector right now. Over the past year, its total return is 44.89% and year-to-date the total return is 7.08%. But a longer look back reveals the difficulty for its long-term investors.

In April 2019, Park Hotels touched a high of $24.75. Right before the pandemic hit the U.S. it was still trading near $20.50. But the share price collapsed to a low of $5.46 by April 2020 and it’s struggled to return to its former glory ever since. It was recently trading at $15.80.

Braemar Hotels is up 14.33% over the past four weeks and its first-quarter earnings report beat the estimates on AFFO and revenue. But Braemar still trades below $3 and its total return over the last five years is -68.05%. That makes it extremely difficult to trust this latest bounce.

One of the most important metrics for Hotel REITs is Revenue Per Available Room (RevPAR). RevPAR is calculated by multiplying the average daily rate by the hotel’s occupancy rate. Park’s 6.7% gain in RevPAR from $262.80 in Q1 2023 to $280.53 in Q1 2024 is significant and provides hope to its long-term investors. Apple Hospitality’s RevPAR also improved by 7% between 2022-2023.

But long periods of inflation often beget recessions and any prolonged recessionary period in 2024 or 2025 could once again disrupt RevPar and occupancy rates as fewer individuals and businesses opt to travel.

Takeaway: Hotel REITs have not performed well since 2020, but seem to be slowly improving over the past year. Park Hotels and Apple Hospitality still sport dividend yields of over 6% and are likely the safest to own in the sector.

 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.