👋 Hello Everyone and Happy Friday. We hope summer wrapped up nicely for all of you and the first week back wasn’t too bad. The best part about a long weekend is a short week!

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Here’s the thing. They say September is the cruelest month on Wall Street and the post-holiday first week of this September has rekindled that anew. It was only last week, that Wall Street was celebrating economic data that indicated the FED would likely pause on hiking rates. But this week, weekly jobless claims came in 14,000 below estimates while labor costs rose more than expected, so angst over future FED policy caused markets to sell off once again.

A majority of REITs were in the red this week, which is painful for those holding long positions, but creates opportunities for anyone with cash on the sidelines. Here were the biggest winners and losers of the week:

📈 Biggest Winners This Week: Retail and industrial REITs had a good week.

• Wheeler Real Estate (NYSE: WHLR) Up 81.33%

• Hudson Pacific Properties (NYSE: HPP) Up 9.10%

• Apple Hospitality REIT (NYSE: APLE) Up 5.99%

• Franklin BSP Realty Trust (NYSE: FBRT) Up 4.58%

📉 Biggest Losers This Week: Hotel and office REITs struggled this week.

• Office Properties Income Trust (Nasdaq: OPI) Down 18.65%

• Diversified Healthcare Trust (Nasdaq: DHC) Down 11.76%

• Ashford Hospitality Trust, Inc. (NYSE: AHT) Down 9.43%

• Safehold Inc (NYSE: SAFE) Down 9.02%

• Outfront Media Inc (NYSE: OUT) Down 7.84%

Prices as of September 7, 12:00 Noon

ONE BIG THING

Bad Romance: Office Heartbreak — OPI and DHC Call Off Merger

Briefly: On September 1, Office Properties Income Trust (Nasdaq: OPI) and Diversified Healthcare Trust (Nasdaq: DHC) announced they have mutually agreed to end their April 11 merger contract, in which Office Properties had agreed to acquire all outstanding common shares of Diversified Healthcare. Both companies canceled their special meetings of shareholders that had been scheduled for September 6 to vote on the merger.

Who They Are: Both REITs are based in Newton, MA. Office Properties Income Trust is an office REIT that owns 155 buildings with over 20.8 million square feet. They primarily lease to single tenants and tenants with the highest credit quality, such as government entities. Office Properties has a present occupancy rate of 90.6%.

• Diversified Healthcare Trust is a REIT that owns 376 healthcare related properties of approximately $7.1 billion across 36 states and Washington, D.C. In addition to 27,389 senior living community units, it also has 100 life sciences and medical offices.

Why This Happened: The proposed merger was quite unpopular with some of Diversified Healthcare Trust’s largest shareholders. Flat Footed LLC, a 9.4% owner of Diversified Healthcare, filed a preliminary proxy statement on June 8 to oppose the merger. Flat Footed strongly urged shareholders to reject the merger, saying the $1.13 per share takeover price dramatically undervalued Diversified Healthcare by as much as 89% and was far below the $4 per share offer that the same Board of Directors rejected as inadequate in May 2022.

Curious Doings: In recent months, Adam D. Portnoy, a Managing Trustee with Diversified Healthcare Trust, had been buying thousands of shares of Diversified Healthcare stock, suggesting a higher valuation than the proposed merger.

• Mr. Portnoy is also the CEO and President of the RMR Group Inc (NYSE: RMR), the external manager for both companies involved in the merger and a member of the Board of Trustees for both REITs. Mr. Portnoy’s insider purchases were another point of criticism by Flat Footed, who said the insider buying was inappropriate and that the proposed merger terms benefit Office Properties Trust and RMR, at the expense of Diversified Healthcare Trust.

• In recent weeks, Diversified Healthcare Trust canceled meetings to officially approve the merger, likely sensing that the support was not there among shareholders. On July 17, Flat Footed put out a statement to say it was encouraged that other large shareholders were joining forces with them in opposing the merger.

Big picture: They say the little guy can’t win against the large and powerful, but in this instance, David stuck it to Goliath pretty good, and as a result, this office “romance” looks like it was squashed in the board room.

Results: On the first trading morning following the announcement, Office Properties Income Trust shareholders were left heartbroken as their stock traded down over11.5%. Diversified Healthcare Trust was down close to 5% before rebounding to finish about 1% lower.

On September 5, Flat Footed LLC had this comment:

• “We are pleased that management and the Board of Trustees concluded that the transaction with OPI is not in the best interests of DHC and its shareholders… FFL looks forward to putting this campaign behind us and working with DHC leadership to expeditiously pursue superior paths.”

Final Remarks: As for CEO Adam Portnoy, who owns 149,450 shares of Office Properties, and over 23 million shares of Diversified Healthcare… well, let’s just say he was not having the best week. By Thursday, noon, Office Properties was down 18.65% and Diversified Healthcare was off 11.76% for the week.

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UPS AND DOWNS

There was a flurry of analyst upgrades and downgrades on REITs to start the holiday-shortened trading week:

Equity Residential (NYSE: EQR) September 5, Wells Fargo analyst James Feldman upgraded Equity Residential from Equal-Weight to Overweight and raised the price target from $62 to $69.

Hudson Pacific Properties Inc (NYSE: HPP) Sept. 5, Piper Sandler analyst Alexander Goldfarb upgraded Hudson Pacific Properties from Neutral to Overweight and raised the price target from $6 to $9.

Regency Centers Corp (Nasdaq: REG) Sept. 5, Raymond James analyst RJ Milligan upgraded Regency Centers from Market Perform to Outperform and announced a $69 price target.

Kite Realty Group Trust (NYSE: KRG) Sept. 5, Raymond James analyst RJ Milligan downgraded Kite Realty Group Trust two levels from Strong Buy to Market Perform.

Federal Realty Investment Trust (NYSE: FRT) Sept. 5, Raymond James analyst RJ Milligan downgraded Federal Realty Investment from Strong Buy to OutPerform and lowered the price target from $115 to $104.

Innovative Industrial Properties Inc (NYSE: IIPR) Sept. 5, Compass Point analyst Merrill Ross downgraded Innovative Industrial Properties from Buy to Neutral and announced a $95 price target.

Newlake Capital Partners Inc (OTCMARKETS: NLCP) Sept. 5, Compass Point analyst Merrill Ross downgraded Newlake Capital Partners from Buy to Neutral and announced a $15.50 price target.

Equity Lifestyle Properties Inc (NYSE: ELS) Sept 5, Wells Fargo analyst James Feldman downgraded Equity Lifestyle Properties from Overweight to Equal-Weight.

REIT ROUND-UP

Four Corners Property Trust Inc (NYSE: FCPT) On September 1, Four Corners Property Trust did something quite unusual - it sold a property, rather than buying one. Four Corners, which seems to report an acquisition or two on a weekly basis, announced the disposition of a Minnesota Red Lobster property for $5.9 million. However, Four Corners sold it using a 1031 tax deferred exchange and said it plans to use the proceeds to purchase a new property.

Caretrust REIT Inc (NYSE: CTRE) September 6, announced it has purchased La Fuente Post Acute, a 187-bed Skilled Nursing Facility in Vista, California in a joint venture for $25.5 million. The facility will eventually be operated by Bayshire Senior Communities, one of Caretrust’s tenants, with a new 15-year lease with the joint venture landlord. The joint venture partner was not named, except to say a “third-party regional healthcare real estate investor”.

ACRES Commercial Realty Corp (NYSE: ACR) Sept 6, An SEC form 4 filing shows that Eagle Point Credit Management LLC, a 10% owner at ACRES Commercial Realty, bought 6,280 shares of ACRES Commercial common stock, in a total transaction of $137,740.

Rexford Industrial Realty Inc (NYSE: REXR) Sept 6, announced the purchase of three industrial properties in California for $46.2 million, using cash on hand.

Mid-America Apartment Communities Inc (NYSE: MAA) Sept 6, announced the retirement of CFO Albert Campbell, effective March 31, 2024. Mr. Campbell will be replaced by Senior VP and Chief Accounting Officer, Clay Holder.

Digital Realty Trust Inc (NYSE: DLR) Sept 7, announced it is expanding into Italy, following the purchase and pre-development of land in Rome.

Terreno Realty Corp (NYSE: TRNO) Sept 7, announced it has purchased a 4.9 acre industrial property in Santa Ana, CA, for $14.8 million. Terreno plans to demolish the three pre-existing multi-tenant office buildings and build a 92,000 square foot industrial warehouse on the site. The warehouse will be completed by 2025, and Terreno already has it 100% pre-leased to a life science company.

HOUSING NEWS BRIEF

Despite the 30-year mortgage rate declining from 7.31% to 7.21%, the number of mortgage applications dropped 2.9% this week, to their lowest levels since 1996. This trend should continue to bode well for occupancy levels and perhaps future rent increases for residential REITs like Mid-America Apartment Communities Inc, Invitation Homes Inc (NYSE: INVH) and American Homes 4 Rent Class A (NYSE: AMH).

UPCOMING EX-DIVIDEND DATES

• Public Storage Operating Co (NYSE: PSA) ex-div 9/12, $3.00, yield 4.20%

• Alpine Income Property Trust Inc (PINE) ex-div 9/13, $0.2750, yield 6.38%

• CTO Realty Growth Inc (NYSE: CTO) ex-div 9/13, $0.38, yield 8.90%

• Medical Properties Trust Inc (NYSE: MPW) ex-div 9/13, $0.15, yield 8.90%

• Regency Centers Corp: ex-div 9/13, $0.65, yield 4.16%

• Extra Space Storage Inc (NYSE: EXR) ex-div 9/14, $0.61, yield 1.93%

• Digital Realty Trust Inc (NYSE: DLR), ex-div 9/14, $1.22, yield 4.10%

• American Homes 4 Rent Class A: ex-div 9/14, $0.22, yield 2.35%.

ONE FOR THE ROAD

Triple Net REITs Struggle To Find Support

What Happened: Triple-Net Retail oriented REITs such as Realty Income Corp (NYSE: O), NNN REIT Inc (NYSE: NNN) and Agree Realty Corporation (NYSE: ADC) are falling through previously held support zones and looking for new bottoms.

Why It Matters: It’s unusual to see these REITs not finding support on pull backs, as they have done many times before. Is Wall Street forecasting a recession by speculating that these REITs have peaked and may begin to see declining occupancies or rent defaults?

Recent Positives: Joey Agree and other insiders at Agree Realty were purchasers of company stock in August at prices between $62.75-$63.00 per share. Yet Agree Realty was trading near $60 this week. Realty Income and NNN REIT have both increased dividends within the past quarter. Q2 Occupancy rates for Realty Income, NNN REIT and Agree Realty were 99.0%, 99.4% and 99.7% respectively. Agree Realty’s has little debt maturities occurring until 2028. So what’s not to like?

Confusing: You wouldn’t think the largest Triple-Net REITs would have recessionary fears, given their tenants are some of the largest, most stable companies in America. How likely are Walmart, Lowe’s, Home Depot, 7-11, and Dollar General to default on rents? Plus, with triple-net leases, the tenants pay all of the expenses of the properties, lowering the risk to REITs.

Final Remarks: But Wall Street wonders if companies like Realty Income are getting too large to continue to grow very much. And it’s not easy for the REITs to find new properties with high enough cap-rates. Since the beginning of August, all three REITs have now slipped below recent support levels. These REITs bear careful watching to see if they can find new support levels from which to bounce over the coming weeks.

PRESENTED BY ROOTS

With Roots, anyone can build wealth through real estate

Roots believes that everyone should have the opportunity to build wealth with real estate. It took them years to build Roots, but you can start investing in 5 minutes.

Roots buys single family properties, fixes them up, manages them, and finds amazing humans to rent them.

It’s easy to get started: You invest in Roots for as little as $100