This REIT Has Been A Disaster But It's Up 138% Since Mid-June

Terreno Realty Corp checks in with a $16 million profitable payday

November 27, 2024

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Happy Wednesday! You are receiving this newsletter one day early this week, because of the Thanksgiving holiday. We wish all our readers and their families a happy and healthy Thanksgiving. All major U.S. stock markets are closed on Thanksgiving, but re-open on Friday with an early close of 1 PM.

Markets were buoyed this week by President-elect Trump’s choice of hedge fund manager Scott Bessent to become the new Treasury Secretary. In addition, real estate stocks received a lift from the appointment of former executive director of the White House Opportunity and Revitalization Council, Scott Turner, as secretary of the Department of Housing and Urban Development. Turner, a former NFL player, has served in Congress and has a background in multi-family housing for JPI, a development and construction company in Dallas, TX.

On Tuesday, the Fed released the minutes from its November meeting which showed that many members are anticipating more interest rate cuts but the pace of cuts will be gradual.

On Wednesday, the Personal Consumption Expenditures Price Index (PCE) rose 0.2% for October and 2.3% annually, in line with expectations. The core inflation numbers were higher, with 0.3% for the month and 2.8% annually.

The benchmark Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was up 1.5% on Wednesday morning and about 75% of all REITs gained this week. Office and healthcare REITs showed strength, especially City Office REIT Inc (NYSE: CIO) and Healthcare Realty Trust Inc (NYSE: HR) up 8% and 6% respectively this week.

In this issue, an underperforming REIT rises 133% in only five months, Terreno Realty Corp. has a $16 million payday and Wall Street’s take this week on several REITs.

REIT on!

—Ethan Roberts

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ONE BIG THING

This REIT Has Been A Disaster… But it’s Up 138% Since Mid-June!

Who: Uniti Group Inc (Nasdaq: UNIT) is a Little Rock, AR specialty REIT that designs and constructs communications infrastructure such as cell towers and provides dark fiber and other wireless solutions for the communications industry. It also delivers internet services to businesses and consumers in Australia.

What: There’s no doubt that Uniti Group performed poorly in the first half of 2024, falling from a high of $6.22 in February until hitting bottom at $2.57 on June 18, 2024. However, this specialty REIT stormed 133% higher since then, touching a 52-week high Monday morning at $6.25 before pulling back to $6.00 by Wednesday. It’s not only the best-performing REIT over that time but has drubbed the second-best performer, American Healthcare REIT Inc (NYSE: AHR) by more than 40%.

And yet, consider the following:

  • On February 29, 2024, Uniti Group reported a fourth-quarter FFO of $0.34 that was inline with estimates, yet revenue of $285.70 million missed the estimate of $295.93 million by a wide mark.

  • On May 3, Uniti Group reported a first-quarter FFO of $0.32, missing the $0.34 estimate. Revenue of $286.40 million also missed the estimate of $287.545 million.

  • On August 1, Uniti Group reported a second-quarter FFO of $0.34, missing the estimate of $0.35.

  • On October 31, Uniti Group reported a third-quarter FFO of $0.33, missing the estimate of $0.34. It also lowered its full-year 2024 FFO guidance from $1.33-$1.40 to $1.23-$1.30. Shares fell over 9% that day.

  • Uniti announced that its audit committee had discovered a material error within its 2023 financial statements.

  • Uniti’s announcement on May 3 to purchase Windstream Holdings II, LLC, a broadband service provider has not been looked upon favorably by some Uniti investors. Ironically, Uniti was a part of Windstream up until 2015 when the two companies split. Windstream filed for bankruptcy in 2019 but emerged from bankruptcy in 2020.

  • On August 1, along with the Q2 report, Uniti announced it was suspending its $0.15 per share dividend until the consummation of the merger with Windstream, which is not expected until the second half of 2025.

Why: So, given the list above of bad performance, unpopular merger and dividend suspension, why are Uniti’s shares so much higher since mid-June? There are several reasons:

  • Revenue for both the second and third quarters beat the Wall Street estimates by a couple of million and in both cases were improvements in year-over-year numbers.

  • On September 27, Uniti announced the pricing of $800 million aggregate principal amount of new Senior First Lien Notes by Windstream at 8.250%, due in 2031. The note contract included provisions to allow for the termination of Uniti’s and Windstream’s debt silos upon the merger closing.

  • On October 17, Uniti announced a new 20-year contract award from an unnamed “strategic hyperscale” customer in Montgomery, AL in which Uniti will construct 90 miles of new multi-conduit systems and high-strand count fiber cables to connect key data center locations in the Montgomery metropolitan area.

  • In the Q3 report, Uniti management noted that EBITDA was expected between $930 million to $950 million for 2024, well above the $923.50 million of 2023.

  • Despite some investor criticism of the deal, Uniti Management notes that they believe the Windstream merger will substantially increase the value of Uniti shares.

  • Uniti Group has made presentations at several financial conferences throughout the year. Presentations often help to lift the share price.

  • The share price has been incredibly undervalued throughout 2024 and Wall Street always looks ahead. Even now, after the huge price run-up, Uniti trades at a price/FFO ratio of only 5.07 in a sub-sector with a median P/FFO of 14.42.

Takeaway: Nobody is predicting that Uniti Group will rise another 133%, but by touching a 52-week high, that could indicate there is still more appreciation to come.

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WHAT WALL ST. SAID ABOUT REITS THIS WEEK

Pebblebrook Hotel Trust (NYSE: PEB) On November 22, Stifel analyst Simon Yarmak upgraded Pebblebrook Hotel from Hold to Buy and raised the price target from $14.75 to $15. Yarmak noted recent improvements in Revenue per Available Room (RevPAR) within West Coast areas such as San Francisco, Los Angeles and Portland that had previously been languishing. Pebblebrook had also received an upgrade a day earlier from Compass Point analyst Floris Van Dijkum, who hiked it from Neutral to Buy, while maintaining the $17 price target.

While analyst Yarmak was enthusiastic about Pebblebrook, on the same day he downgraded another Hotel REIT, DiamondRock Hospitality Co (NYSE: DRH) from Buy to Hold, while trimming the price target from $10.75 to $10.25. The analyst was less sanguine about DiamondRock’s recent $30 million purchase of the Minneapolis 245-room AC Hotel because it has never fully ramped up since the COVID-19 era. Yarmak reduced the 2025 FFO estimate on DiamondRock from $1.04 to $1.01

And speaking of Hotel REITs, on November 26, Wells Fargo analyst Dori Kesten maintained positions on several of them. Kesten kept an Underweight rating on Service Properties Trust (Nasdaq: SVC) and lowered the price target from $4 to $3, noting it went to the REITworld conference and was seeking a reason to upgrade SVC but could not find one. The decline of EBITDA from pre-COVID levels and SVC’s stabilized margin expectations disappointed the firm. SVC was down to $2.77 by Wednesday morning.

Welltower Inc (NYSE: WELL) On November 26, Scotiabank analyst Nicholas Yulico maintained healthcare REIT Welltower at Outperform and raised the price target from $133 to $142. Although the 10-year Treasury bond yields have increased and put pressure on REITs, Scotiabank sees slightly more upside possible for Welltower, trading near $140 on Wednesday.

Alexandria Real Estate Equities Inc (NYSE: ARE) On November 27, JP Morgan analyst Anthony Paolone downgraded Alexandria Real Estate from Overweight to Neutral and lowered the price target from $133 to $121. JP Morgan is reducing its forecast for full-year 2024 FFO from $9.47 to $9.46 and full-year 2025 from $9.67 to $9.35. JP Morgan cites several lease expirations in 2025 and increased expenses for its downward revisions. Alexandria is a healthcare REIT with a focus on life science properties. 

FIVE ZINGERS:

Nice Payday: Terreno Realty Corp (NYSE: TRNO) On November 22, Terreno Realty announced the completion of the sale of its industrial property in Doral, FL for $20.6 million. The fully leased 75,000-square-foot industrial distribution building on 2.8 acres was purchased by Terreno in 2012 for approximately $4.2 million.

Tight Security For The Tax Man: On November 22, Easterly Government Properties Inc (NYSE: DEA) announced it acquired a 13-acre,100,000-square-foot facility in Ogden, UT, leased to the General Services Administration (GSA), to be used by the Internal Revenue Service (IRS). The facility includes chemical sniffing K9s, bomb detection equipment, gated access, guard stations, 24/7 security system monitoring and other security measures. Easterly directly or indirectly owns 97 properties and pays a lucrative 8.51% dividend yield.

Everyone’s Gone To The Movies: AMC Entertainment Holdings Inc (NYSE: AMC) was up close to 6% on Monday following its announcement that it saw its highest domestic revenue ever over the pre-Thanksgiving weekend. Several REITs, including NNN REIT Inc (NYSE: NNN) and EPR Properties (NYSE: EPR) have AMC theaters in their portfolios.

They’re Back! Scott Rechler, Chairman/CEO of real estate developer and investment manager, RXR, says that demand for NYC office space is increasing again as more NYC companies mandate 5-day work weeks and demand for Class A buildings grows. REITs such as SL Green Realty Corp (NYSE: SLG) and Vornado Realty Trust (NYSE: VNO) have benefited from the trend with huge gains in the second half of 2024.

Contrarian Opinion: Redfin CEO Glen Kelman predicts rent declines in 2025 as people are now used to higher interest rates and will reluctantly return to the real estate market. When renting is less expensive than buying, rental demand is usually strong, however, if Kelman is right, this would be a negative for REITs such as Mid-America Apartment Communities Inc (NYSE: MAA), Camden Property Trust (NYSE: CPT) and AvalonBayCommunities Inc (NYSE: AVB), which have all been big winners in 2024.

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