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- 🪦 REITs: Why Mr. Market Is Dead Wrong!
🪦 REITs: Why Mr. Market Is Dead Wrong!
The American Dream That's Still Unloved
Ethan Roberts
May 31, 2024
Happy Friday! We hope you enjoyed your Memorial Day weekend. The shortened week began with stocks getting a morning pop but quickly running out of steam in the afternoon. The next few days saw markets pulling back, with interest-sensitive stocks like REITs losing a great deal of ground that was gained from mid-April through mid-May. Those who adhere to “Sell in May and go away” looked really smart as markets seemed disillusioned about rate cuts in 2024. But the sun came out again on Thursday and REITs were again in the green.
In This Issue: Why the stock market is all wrong about REITs, Why Flyover Country may be unloved but is the best bet for first-time homebuyers, and Four Corners Property Trust is on yet another shopping spree.
REIT ON!
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Unlock greater financial opportunities and security with real estate investments that can help you achieve consistent double-digit returns.
DLP Housing Fund: 10-12% targeted annual net return, 6% preferred return paid monthly.
DLP Building Communities Fund: 11-13% targeted annual net return. 8% preferred return paid quarterly.
There’s more, including the DLP Lending Fund and the DLP Preferred Credit Fund.
REIT ROUNDUP:
American Strategic Investment Co (NYSE: NYC) On May 23, Bellevue Capital Partners announced it increased its original May 7 tender offer to American Strategic Investment Co from $9.25 to $10.25 per share, up to 125,000 shares.
Four Corners Property Trust Inc (NYSE: FCPT) May 24, announced it has acquired eight Mavis Tire-operated properties across six states (AL, GA, LA, NJ, NY, TN) via a sale-leaseback transaction, for $20 million. All six properties are under long-term triple net leases. On May 28, Four Corners announced it had acquired a National Veterinary Associates property in Florida for $1.8 million. The corporate-owned property has a new long-term, triple-net lease with annual rent escalations. (See full story below)
JBG Smith Properties (NYSE: JBGS) May 29, announced the formation of LEO Impact Capital, a housing investment management platform, to acquire, operate and preserve middle-income housing in fast-growing neighborhoods that are vulnerable to increasing housing costs.
Sotherly Hotels Inc (Nasdaq: SOHO) May 29, received a notice from Nasdaq for failing to file a quarterly report for Q1 2024 on time.
WINNERS & LOSERS
📈 Biggest Winners This Week: Mortgage and Healthcare REITs
Claros Mortgage Trust Inc (NYSE: CMTG) Up 9.66%
Strawberry Fields Reit Inc (NYSE: STRW) Up 8.22%
Global Medical REIT Inc (NYSE: GMRE) Up 5.66%
Orion Office REIT Inc (NYSE: ONL) Up 4.91%
DigitalBridge Group Inc (NYSE: DBRG) Up 4.27%
Clipper Realty Inc (NYSE: CLPR) Up 4.24%
Invesco Mortgage Capital Inc (NYSE: IVR) Up 3.95%
Americold Realty Trust Inc (NYSE: COLD) Up 3.13%
📉 Biggest Losers This Week: Office REITs
Seritage Growth Properties Class A (NYSE: SRG) Down 7.21%
BrightSpire Capital Inc (NYSE: BRSP) Down 4.89%
Franklin BSP Realty Trust, Inc. (NYSE: FBRT) Down 3.96%
Peakstone Realty Trust (NYSE: PKST) Down 3.82%
Camden Property Trust Inc (NYSE: CPT) Down 3.66%
Boston Properties, Inc. (NYSE: BXP) Down 3.08%
Upgrades:
Sunstone Hotel Investors Inc (NYSE: SHO) May 28, Baird analyst Michael Bellisario upgraded Sunstone Hotel Investors from Neutral to Outperform and raised the price target from $11 to $12.
and Downgrades:
AFC Gamma Inc (Nasdaq: AFCG) May 28, Compass Point analyst Merrill Ross downgraded AFC Gamma from Neutral to Sell and announce a $10 price target.
CubeSmart (NYSE: CUBE) May 29, BMO Capital analyst Juan Sanabria downgraded CubeSmart from Outperform to Market Perform and reduced the price target from $50 to $47.
ONE BIG THING
REITs: Why Mr. Market Is Dead Wrong!
What: The National Association of Real Estate Investment Trusts (Nareit) is an association that represents public and private REITs and provides information and education on these financial areas. It was organized in 1960, immediately after President Eisenhower signed legislation that created the first REITs.
In 2015, Nareit began reporting quarterly industry performance trackers, or “T-Trackers” that statistically track funds from operations (FFO), Net Operating Income (NOI) and Dividends paid by REITs.
Nareit recently released its first-quarter 2024 T-Tracker and among its many findings were:
Over two-thirds of all REITs reported Year-Over-Year increases in NOI, with average increases of 2.8%.
Nearly two-thirds of all REITs reported Y.O.Y increases in FFO, with FFO up 1.0% during that time.
Occupancy rates have remained steady at an average of 93.2%
89.6% of total debt was at a fixed rate and 79.2% of debt was unsecured.
48% of REITs reporting FFO guidance maintained a previous outlook, 41% raised the guidance and only 11% lowered it.
REITs as a whole are paying out more in dividends than ever before.
Who: Despite these positive numbers, REITs have struggled in the first quarter and thus far into Q2. Year-to-date, The Vanguard Real Estate Index Fund ETF (NYSE: VNQ) has had a total return of -8.59%. Individual stalwart REITs such as Prologis Inc (NYSE: PLD) and Realty Income Corp (NYSE: O) are down 22% and 12.63%, respectively. In 2024, about two-thirds of all REITs are in negative territory. 75 REITs have suffered losses of 10% or more.
Why: Wall Street still believes that higher interest rates will decimate REITs. In its myopic view, REITs cannot refinance interest rates cheaply, acquire new properties, keep rents and occupancy stable or sustain earnings and revenue. But as the Nareit tracker shows, this is not true. Wall Street simply got it wrong and continues to do so. The only times that REITs have appreciated in 2024 are when inflationary numbers have been below expectations, raising hope for interest rate cuts. But each time the Fed splashes cold water on that, REITs have sold off.
A year ago, Wall Street’s panic over declining occupancy in Office REITs sent SL Green Realty Corp (NYSE: SLG), the largest commercial landlord in New York City, skidding from $70 to $18 per share. However, it’s recovered nicely and was trading near $57 before the FED’s most recent meeting minutes were released. This week’s market pullback has SL Green trading near $50 again.
Takeaway: Wall Street must realize that REIT executives are very clever at adapting to an inflationary environment. Many REITs have sold off poorly-performing properties with substantial equity to reduce or eliminate debt or acquire new properties with higher CAP rates. Very few REITs have cut their dividends in 2024, making those bearish predictions by analysts look silly.
Mr. Market, you got it wrong. It’s time to stop punishing REITs and realize that much of the sector is now undervalued but handling the interest rate environment fairly well. As for investors, these times can be a golden opportunity for those who are willing to collect fat dividends while they wait for interest rates to decline, no matter how long it may take.
“Flyover Country”: The American Dream That’s Still Unloved
What: “Flyover Country” is a term that refers to the vast areas of the U.S. that one passes through on a flight from large East Coast cities to the West Coast. Over time, the phrase’s meaning has also become somewhat pejorative by certain elitists, who view Middle America as areas to “fly over” but certainly no place to live.
But as Mr. Dylan once sang, “The times they are a changing.” For millions of Americans who can no longer afford the high cost of owning or renting a home, “Flyover Country” may become the new place to be.
Why: Pew Research Center estimates that about 22 million Americans, or roughly 14% of the population, work from home 100% of the time. Many of these workers are the lowest paid. Approximately 42% of those who earn under $50,000 annually are fully remote. This demographic is the one struggling the most with the high cost of housing, especially in large East and West Coast cities. Since their jobs do not force them to work from a specific location, most could live anywhere, provided they have Internet connections.
Unfortunately, many discouraged Gen Z and Millennial workers have thrown in the towel on ever being able to buy a home. They look around at homes costing $400,000 or more and feel frustrated they can’t afford them on an average salary. Instead of saving for down payments and closing costs, they’re spending like there’s no tomorrow and are racking up serious credit card debt. Many are paying 40% or more of their income on rent. These decisions are a disaster for their financial future.
Where: But homebuying opportunities in the Midwest are still plentiful and are the best bet for first-time homebuyers in 2024. Over 50% of Realtor.com’s top housing markets are in the Midwest. Zillow Group Inc Class C (NYSE: Z) ranks St. Louis, Detroit, Minneapolis and Indianapolis as the top four markets for first-time homebuyers in 2024.
According to the National Association of Realtors (NAR), the $241,000 median home price in St. Louis is far below the Nationwide median price of $407,600 and $500,000 to $600,000 for cities such as New York and Boston. Prices in West Coast cities such as Los Angeles, San Francisco, and Denver are even higher than on the East Coast.
Other affordable smaller towns like Springfield, IL, South Bend, IN, Rockford, IL and Peoria, IL, still have median prices below $200,000. States such as Iowa, Louisiana, Kentucky, Indiana, Ohio, and Oklahoma still have median prices of $250,000 or below. Rural areas in these states may provide the least expensive prices of all.
Takeaway: Many smaller cities or rural areas may lack the coastal cities' cultural amenities and social advantages that attract younger generations. The weather in parts of the Midwest and South can be rough. And of course, it’s never easy to leave friends and families behind or to move to an unfamiliar location. But for millions of Americans, going “flyover” may be their only chance at ever owning a piece of the American dream.
ONE FOR THE ROAD
Another Buying Spree For Four Corners
Who: Four Corners Property Trust Inc (NYSE: FCPT) is a Mill Valley, CA diversified REIT, with a focus on owning net-leased restaurants, medical and dental services, automotive services and other retail properties in the Sunbelt regions of the U.S. Four Corners was created in 2015 with 418 restaurants spun out from Darden Restaurants, Inc. (NYSE: DRI). However, as time has progressed, many Darden properties were sold off and the company has steadily acquired more diversified properties. At the end of Q1 2024, Four Corners had 1115 properties with 149 tenant brands.
What: But why stop there? Four Corners has been on another buying spree within the past six weeks. FCPT’s recent purchase announcements were:
May 28: Acquired a National Veterinary Associates Property in Florida, with a long-term, triple net lease and annual escalations.
May 24: Acquired 8 Mavis Tire Properties in $20 million sale-leaseback agreements across six states.
May 15: Acquired a Longhorn Steakhouse property in Illinois for $2 million.
April 30: Acquired a Patient First Urgent Care Property in Pennsylvania for $6.6 million. The property is in a highly trafficked area with a triple net lease with approximately 10 years remaining.
April 11: Acquired a Banfield Pet Hospital in Iowa for $2.4 million.
How: Four Corners Property Trust is one of the most aggressive REITs today in purchasing properties, but they are also very selective in the types of properties they buy. Most leases have initial 10-year terms or longer and the weighted average lease term (WALT) remaining is 7.6 years. Most are located in fast-growing, affluent suburban areas, with Cap rates between 7% and 8%.
At the end of Q1 2024, Four Corners had a 99.6% occupancy rate and had received 99.7% of all rents. Those are solid numbers.
Four Corners’ largest problem is the 18 Red Lobster restaurants it still owns, as Red Lobster recently filed for bankruptcy. However, those only comprise 1.7% of its total average base rent (ABR).
Takeaway: With this week’s pullback of REIT prices, Four Corners’ dividend yield is now just below 6%. It’s a REIT that isn’t afraid to step up and buy properties when it sees a good deal, yet it’s careful how it handles its debt. Four Corners touched $25.44 before this latest pullback and with a recent price of $23.76, now could be time to consider a purchase.
PRESENTED BY DLP CAPITAL
Unlock greater financial opportunities and security with real estate investments that can help you achieve consistent double-digit returns.
DLP Housing Fund: 10-12% targeted annual net return, 6% preferred return paid monthly.
DLP Building Communities Fund: 11-13% targeted annual net return. 8% preferred return paid quarterly.
There’s more, including the DLP Lending Fund and the DLP Preferred Credit Fund.