Happy Friday! In the first part of the week, further selling in tech stocks and stellar earnings reports with positive full-year forecasts fueled higher REIT prices. Markets were eagerly awaiting word from FED chairman Jerome Powell this week on the likelihood of the FED cutting interest rates in September.

On Wednesday, investors rejoiced when Jerome Powell stated, “If that test (data showing inflation is slowing enough) is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.” Lower interest rates help REITs to refinance existing loans and acquire new ones at more favorable cap rates.

In this issue, several REITs hike their full-year 2024 earnings forecasts, Irenic Capital Management successfully pressures Equity Commonwealth to liquidate and a new trend shift emerges in nationwide real estate sales.

REIT ROUNDUP:

CBL & Associates Properties, Inc. (NYSE: CBL) July 30, announced it has opened an Atrium Health Wake Forest Baptist Medical Plaza in Greensboro, NC.

Agree Realty Corporation (NYSE: ADC) July 29, announced it has received an issuer rating upgrade from S&P Global Ratings from BBB to BBB+.

Four Corners Property Trust Inc (NYSE: FCPT) July 26, announced it has acquired a franchise-operated Taco Bell property in Illinois. The property is under a triple net lease to K-MAC Enterprises, Inc. with approximately five years of term remaining and was priced at a 7.5% cap rate on rent as of the closing date and exclusive of closing costs.

Terreno Realty Corp (NYSE: TRNO) August 1, announced it has pre-leased 67% of Countyline Corporate Park Phase IV Building 33 in Hialeah, FL. The seven-year lease is for 105,000 square feet.

Upgrades:

Invitation Homes Inc (NYSE: INVH) July 26, Evercore ISI Group analyst Steve Sakwa upgraded Invitation Home from In-Line to Outperform and maintained the price target at $37.

Alexander & Baldwin Inc (NYSE: ALEX) Piper Sandler analyst Alexander Goldfarb upgraded Alexander & Baldwin from Neutral to Overweight and raised the price target from $17 to $22.

…and Downgrades

Host Hotels & Resorts Inc (Nasdaq: HST) August 1, Compass Point analyst Floris Van Dijkum downgraded Host Hotels & Resorts from Buy to Neutral and lowered the price target from $25 to $18.

Public Storage (NYSE: PSA) August 1, Truist Securities analyst Ki Bin Kim downgraded Public Storage from Buy to Hold and maintained the price target at $306.

Community Healthcare Trust Inc (NYSE: CHCT) July 31, Evercore ISI Group analyst Steve Sakwa downgraded Community Healthcare Trust from In-Line to Underperform and lowered the price target from $27 to $25.

Healthcare Realty Trust Inc (NYSE: HR) July 30, Wells Fargo analyst Joseph Feldman downgraded Healthcare Realty Trust from Equal-Weight to Underweight and lowered the price target from $17 to $16.

Alexandria Real Estate Equities Inc (NYSE: ARE) July 29, Bank of America Securities analyst Jeffrey Spector downgraded Alexandria Real Estate from Buy to Neutral and lowered the price target from $151 to $126. On July 25, Evercore ISI Group analyst Steve Sakwa downgraded Alexandria Real Estate from Outperform to In-Line and lowered the price target from $133 to $126.

Weyerhaeuser Co (NYSE: WY) July 25, announced it has acquired 84,300 acres of high-quality timberlands in Alabama for $244.0 million. The purchase was secured through multiple transactions.

Dividend News:

Iron Mountain Inc (NYSE: IRM) August 1, announced an increase in its quarterly dividend from $0.65 to $0.715 per share, payable October 3 to shareholders of record on September 16.

Community Healthcare Trust Inc: July 25, announced its Board of Directors increased its common stock cash dividend for the quarter ending June 30, 2024, from $0.46 to $0.4625 per share. The dividend is payable on August 23 to shareholders of record on August 9.

Second-Quarter 2024 Earnings News:

The following table includes the REITs that beat the street estimates for “earnings” (EPS, FFO, AFFO) and revenue, and topped their Q2 2023 numbers. Many other REITs that reported this past week either missed analyst consensus estimates or failed to beat their Q2 2023 numbers.

WINNERS & LOSERS

📈Biggest Winners This Week: Office, Retail, and Diversified REITs.

• Retail Opportunity Investments Corp (NYSE: ROIC) Up 19.73%

• Iron Mountain Inc (NYSE: IRM) Up 11.31%

• Hudson Pacific Properties Inc (NYSE: HPP) Up 9.77%

• Acadia Realty Trust (NYSE: AKR) Up 8.55%

• Cousins Properties Inc (NYSE: CUZ) Up 7.86%

• American Tower Corp (NYSE: AMT) Up 7.84%

• Alexander & Baldwin Inc (NYSE: ALEX) Up 6.81%

• SBA Communications Corp (Nasdaq: SBAC) Up 6.58%

• Kimco Realty Corp (NYSE: KIM) Up 6.22%

📉 Biggest Losers This Week: Healthcare REITs were weak.

• Wheeler Real Estate Investment Trust Inc (Nasdaq: WHLR) Down 48.98%'

• Community Healthcare Trust Inc (NYSE: CHCT) Down 19.46%

• Peakstone Realty Trust Inc (NYSE: PKST) Down 11.37%

• BrightSpire Capital Inc (NYSE: BRSP) Down 10.76%

• Medical Properties Trust Inc (NYSE: MPW) Down 10.00%

• Geo Group Inc (NYSE: GEO) Down 8.78%

• City Office REIT Inc (NYSE: CIO) Down 7.82%

• LTC Properties Inc (NYSE: LTC) Down 6.57%

ONE BIG THING

REITs Lift Full Year 2024 Earnings Forecasts

What: This week, several REITs beat second-quarter FFO/AFFO estimates AND revised full-year 2024 FFO projections upwards:

Who: Essex Properties Trust Inc (NYSE: ESS) On July 30, Essex Properties announced Core FFO of $3.94 per share, beating the $3.85 street estimate. Revenue of $442.35 million beat the estimate of $431.82 million. More importantly, Essex raised its full-year (FY) Core FFO outlook from $15.03-$15.43 to $15.38-$15.62. The street estimate was for $15.39.

Equity Residential (NYSE: EQR) On July 29, Equity Residential Properties raised its FY 2024 FFO guidance from $3.80-$3.90 to $3.86-$3.92. Equity Residential reported Q2 FFO of $0.97 per share, beating the estimate of $0.96. Revenue of $734.163 million just missed the estimate of $734.368 million but was a nice improvement from $717.309 million in the same period last year.

Welltower Inc (NYSE: WELL) On July 29, Welltower raised its FY24 Normalized FFO guidance from $4.05-$4.17 to $4.13-$4.21 per share. Welltower’s Q2 FFO of $1.05 per share beat the estimate of $1.01. While its revenue of $1.82 billion missed the consensus estimate of $1.89 billion, it topped its revenue of $1.67 billion from Q2 2023.

Alexander & Baldwin Inc: On July 25, Alexander & Baldwin raised its FY 24 AFFO per share outlook from $0.89-$1.00 to $0.99-$1.08. Alexander & Baldwin reported FFO of $0.16 per share, beating the $0.14 estimate and its Q2 2023 FFO of $0.15. Revenue of $51.047 million beat the analyst consensus estimate of $48,200 million but was shy of Q2 2023 revenue of $53,100 million.

Others raising FY 2024 earnings projections by smaller amounts were Acadia Realty Trust (NYSE: AKR), BXP Inc (NYSE: BXP), Kite Realty Corp (NYSE: KRC), Centerspace (NYSE: CSR), Brixmor Property Group Inc (NYSE: BRX), Cousins Properties Inc (NYSE: CUZ), NNN REIT Inc (NYSE: NNN) and VICI Properties Inc (NYSE: VICI).

Takeaway: Since 2022, Wall Street and analysts have assumed that higher interest rates and inflation would kill REIT earnings, but that has not been the case. Many REITs continue to perform well and see better times ahead.

U.S. Real Estate Markets See Trend Shifts

What: Inventory and price changes in different U.S. real estate markets are reversing as buyers forgo previously hot areas and re-focus on cooler ones.

Where: For several years, home prices in specific parts of Texas, Louisiana, Mississippi and Southwest Florida were booming and inventory was tight. Meanwhile, the Midwest, Northeast and West Coast had growing inventories and softening prices.

But those trends are reversing as many buyers realize that previously hot areas have become unaffordable. Inventories are rising in many parts of the Gulf Coast such as Tampa and New Orleans, while markets in the Northeast and Midwest are seeing home price growth again.

Why: The Northeast and Midwest saw many people moving out of state between 2020-2022 due to COVID-19 restrictions, retiring Baby Boomers and the emerging trend of working from home. This led to a boom in the Sun Belt regions where such restrictions were less severe.

When inventories rise, supply exceeds demand and prices begin to soften. Conversely, when inventories tighten, demand exceeds supply and prices rise.

Takeaway: Prices lead demand and this trend reversal is likely a result of people looking for the most home they can afford. The increase in home-based workers has made it far easier to remain employed while moving across the state or into another part of the country.

ONE FOR THE ROAD

Irenic Capital Management To Equity Commonwealth: “Don’t Buy, Sell!”

What: On July 26, Irenic Capital Management, LP, a New York-based investment management fund and a large shareholder of Equity Commonwealth (NYSE: EQC) issued a statement telling Equity Commonwealth to stop looking for acquisitions and instead to pursue a liquidation of the company.

WHO: Equity Commonwealth is a Chicago-based, self-managed Office REIT, with a small portfolio of only four properties totaling $1.5 million. Its portfolio is located in Denver CO, Austin, TX and Washington, D.C. Real Estate icon, Sam Zell was the Board Chairman from 2014 until he died in May 2023.

WHY: Irenic Capital’s statement read, “After a decade of underperformance, it is time for EQC’s Board to focus exclusively on an orderly liquidation….we urge the Board to heed the clear shareholder feedback and commit to scheduling a vote on a prospective liquidation when second-quarter earnings are announced next week.

WHEN: Irenic Capital’s letter followed another letter by 3% owner, Indaba Capital Management, L.P. on July 22 which also criticized the management for faulty actions and decisions that have left the REIT undervalued.

The Board of Directors has given management until the end of 2024 to acquire a multi-billion dollar deal or lose its jobs. Irenic points out that this pressures management into possibly making a bad decision and creates conflicts of interest with its shareholders by compromising Equity Commonwealth’s leverage in any negotiations for an acquisition.

Irenic Capital’s letter pulls no punches when it says, “It is time for the Board and management to carefully reflect on what is best for shareholders, not what is best for you as long-serving directors and highly paid executives.”

Irenic Capital is right about a decade of underperformance, as the total return over the past 10 years is only 2.43%, including dividends. However, that doesn’t tell the whole story. From 2015 to 2019, Equity Commonwealth produced a 49.04% return, an average annual total return of 8.32%. The COVID-19 era hurt its performance as it did so many other REITs, but the stock has not bounced back since 2022 as many other Office REITs have.

Takeaway: Previously in this newsletter, we have featured stories about hedge and investment funds with large stakes in REITs that pressure the Board of Directors to change management, policies, or board members. But usually, they stop short of asking for the liquidation of the entire company.

Update: On July 30, Equity Commonwealth released its Q2 operating results. Funds from Operations (FFO) of $0.24 per share missed the consensus estimate of $0.26, however, the FFO increased from $0.22 in Q2 2023. Revenue of $14.12 million was 3.2% below revenue of $14.59 million in the second quarter of 2023.

On July 31, Equity Commonwealth acquiesced to the pressure and announced it would pursue liquidation following shareholder feedback. Irenic Capital Management issued this statement: We commend Equity Commonwealth’s Board and its management team for making the difficult but correct decision to recommend a liquidation. At the risk of being too subtle: we’re pleased.”

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