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Two REIT Sectors That Could Outperform When Interest Rates Decline
Crown Castle Makes Big Changes To Lift 2024 AFFO
Ethan Roberts
June 14, 2024
Happy Friday! Investors got great news this week when the May Consumer Price Index (CPI) report was unchanged and below the Dow Jones estimate for a 0.1% increase. The year-over-year number was 3.3%, also a tick below expectations. Core inflation numbers were also lower than expected.
Markets jumped on this news. Fed Fund futures were predicting a 70% chance of the FED cutting rates in September and 74% for another cut before the end of 2024.
At his post-meeting news conference, Fed Chairman Jerome Powell stated that the FED sees “modest further progress toward the committee’s two percent inflation objective”. Markets cheered this news.
REITs stormed higher after a slow start to the week, especially office REITs such as SL Green Realty Corp (NYSE: SLG) and Vornado Realty Trust (NYSE: VNO), which climbed almost 9% by mid-day, before pulling back some in the afternoon (see full story below).
The Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was up 0.13% this week.
In This Issue: A look at which REIT sectors will likely lead the eventual decline in interest rates, Big Changes at Crown Castle offer hope and The VA rolls back an important rule to help vets land a home.
REIT ON!
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.
REIT ROUNDUP:
Four Corners Property Trust Inc (NYSE: FCPT) June 6, announced it has acquired a Mercy Health Clinic in Missouri for $3.8 million, with a corporate-operated triple net lease with five years left on the term. The transaction was priced with a 7.1% cap rate. June 7, announced it had acquired a MercyOne Outpatient Clinic property In Iowa for $3 million. The property is corporate-operated under a long-term, triple-net lease with approximately six years remaining. The transaction was priced at a 7.2% cap rate.
Innovative Industrial Properties Inc (NYSE: IIPR) June 10, announced the acquisition of a 16-acre Ocala, FL industrial property for $43 million. Along with the purchase, Innovative Industrial has entered into a long-term, triple-net lease with a subsidiary of AYR Wellness Inc (OTCMKTS: AYRWF).
Ashford Hospitality Trust, Inc. (NYSE: AHT) June 13, announced it has closed on the sale of Springhill Suites and the Fairfield Inn in Kennesaw, GA. for $17.50 million. After paying off the outstanding $10.8 million mortgage, all remaining proceeds will be used for general corporate purposes such as paying down company debt.
Dividend News:
Realty Income Corp (NYSE: O) June 12, declared yet another monthly dividend increase, from $0.2630 to $0.2635 per share. The dividend will be paid on July 15 to shareholders as of July 1. The annualized dividend will rise from $3.150 to $3.156 per share.
Upgrades:
Mid-America Apartment Communities Inc (NYSE: MAA) June 13, Janney Montgomery Scott analyst Robert Stevenson upgraded Mid-America Apartment Communities from Neutral to Buy and announced a $150 price target.
and Downgrades:
NexPoint Residential Trust Inc (NYSE: NXRT) June 11, Deutsche Bank analyst Omotayo Okusanya downgraded NexPoint Residential from Buy to Hold and maintained the Price target at $38.
WINNERS & LOSERS
📈 Biggest Winners This Week: Office, Mortgage and Storage REITs
Net Lease Office Properties (NYSE: NLOP) Up 9.32%
National Storage Affiliates Trust (NYSE: NSA) Up 6.36%
Extra Space Storage Inc (NYSE: EXR) Up 5.95%
Farmland Partners Inc (NYSE: FPI) Up 5.00%
NewLake Capital Partners Inc (OTCMKTS) Up 4.01%
SL Green Realty Corp (NYSE: SLG) Up 3.69%
Terreno Realty Corp (NYSE: TRNO) Up 3.28%
Iron Mountain Inc (NYSE: IRM) Up 2.65%
📉 Biggest Losers This Week: Specialty REITs
Medical Properties Trust Inc (NYSE: MPW) Down 13.64%
Seritage Growth Properties Class A (NYSE: SRG) Down 10.06%
Geo Group Inc (NYSE: GEO) Down 6.75%
PotlatchDeltic Corp (Nasdaq: PCH) Down 5.77%
Clipper Realty Inc (NYSE: CLPR ) Down 5.43%
DigitalBridge Group Inc (NYSE: DBRG) Down 4.72%
Uniti Group Inc (Nasdaq: UNIT) Down 4.59%
City Office REIT Inc (NYSE: CIO ) Down 4.59%
ONE BIG THING
Two REIT Sectors That Could Outperform When Interest Rates Decline
What: Investors caught a whiff of which REITs could start to outperform all the others yesterday when the May CPI report came in below predictions. Most REITs traded higher on the news, but two sectors in particular dominated the rest and signaled what may happen when rates begin to decline.
Office REITs and Mortgage REITs (mREITs) were the two best sub-sectors among all REITs yesterday and outperformed the rest of the REIT sector.
Why: Rising interest rates and the “higher for longer” mentality that has permeated the stock market over the past two years have depressed the share prices of many office and mortgage REITs, as they cannot refinance existing debt at lower levels. In some cases, assets had to be sold to pay off heavy debt loads or to preserve liquidity.
Well-known Mortgage REIT Anally Capital Management, Inc. (NYSE: NLY) and office REIT SL Green Realty Corp were forced to cut dividends in March and December 2023 respectively. Other office REITs that cut dividends in 2023 were Vornado Office Realty Trust, Piedmont Office Realty Trust, Inc. (NYSE: PDM) Hudson Pacific Properties Inc (NYSE: HPP) and Brandywine Realty Trust (NYSE: BDN).
Three mREITs that have cut dividends in 2024 are Ares Commercial Realty Corp (NYSE: ACR), KKR Real Estate Finance Trust Inc (NYSE: KREF) and Claros Mortgage Trust Inc (NYSE: CMTG).
Every time a favorable inflation report has been released, these two sub-sectors have performed well as interest rate cuts will help office REITs to re-finance existing debt at lower rates and increase the book values of mREITs.
Who: On Wednesday, SL Green led all REITs above $4 with a 5.65% gain. Vornado rose 3.83% and Highwoods Properties Inc (NYSE: HIW) was up 3.76%. Among mREITs, Chimera Investment Corporation (NYSE: CIM), MFA Financial Inc, (NYSE: MFA), Redwood Trust Inc (NYSE: RWT) and Blackstone Mortgage Trust Inc (NYSE: BXMT) were all up over 3%. 8 of the top 12 REITs overall on Wednesday were either office or mREITs.
Takeaway: If Wednesday’s CPI report indicates that inflation is finally under control and that rate cuts will be forthcoming in 2024-2025, now could be the time to slowly add shares within these two sectors to your portfolio while share prices are still fairly low and dividend yields are high.
VA Reverses Rule On Paying Buyer Brokers
What: This week the Veterans Administration (VA) reversed a long-standing policy that disallows homebuyers using VA loans to pay a Buyer’s Broker. The VA said it would temporarily allow homebuyers to pay buyer broker fees so that those using VA loans would not be at a disadvantage in a marketplace with new rules regarding the payment of broker commissions.
Why: With the recent $418 million court settlement between the National Association of Realtors (NAR) and several plaintiff sellers, buyer brokers are no longer guaranteed an automatic commission split from sellers and will either be paid by the buyer, or the seller may pay if they agree to do so. Historically, VA loans would not permit buyers to compensate a buyer’s Broker as a way of “protecting” buyers. However, recently that “protection” became a distinct disadvantage, as sellers realized they would still be forced to pay the buyer’s broker on a VA loan contract, whereas with FHA or Conventional loans, they would not be.
Such “protections” have often put veterans at a disadvantage in purchasing homes in the past. During periods when real estate markets were hot, VA buyers had difficulty competing with buyers who had FHA or Conventional mortgages because the VA loans had more stringent appraisal and contractual rules.
VA appraisers had to stipulate that a roof had five or more usable years of life remaining and VA loan buyers were not permitted to pay certain closing costs that other buyers normally paid. When home sellers received multiple offers, they would often reject contracts with VA loans, even if the purchase price offer was slightly higher than other bids.
Takeaway: Hopefully, in time the VA will see fit to remove the “temporary” tag and make this ruling permanent so that veterans are on equal footing with others in a competitive marketplace. Given the sacrifices that veterans make for our country, they deserve to have a better opportunity to secure a nice home.
ONE FOR THE ROAD
Crown Castle Makes Big Changes To Lift 2024 AFFO
Who: Crown Castle Inc (NYSE: CCI) is a Houston, TX-based specialized REIT that owns, operates and leases cell towers long-term. Crown Castle presently owns more than 40,000 cell towers, 90,000 route miles of fiber and 115,000 small cells in its portfolio. It works with businesses and governments to design and build solutions that meet connectivity needs like wireless coverage and custom fiber optic networks.
What: On June 11, Crown Castle announced it would make operational changes including a CapEx reduction of $275 to $325 million in its Fiber segment, and said it could save another $60 million in expenses by laying off 10% of its staff and closing some of its offices. Crown Castle is now reviewing its Fiber and small cell segments with plans to increase its revenues in those areas.
As a result of these savings and revenue enhancements, Crown Castle said it would raise its full-year 2024 AFFO guidance from $6.91 to $7.02 per share.
Why: Sometimes folks need a little nudge to wake up, overcome complacency, and put the wheels of change into motion. Crown Castle has been publicly sparring with former Co-founder and former CEO, Ted Miller, and Elliot Investment Management for many months. Miller, et. al have asserted that the present Board of Crown Castle and management have done a disservice to shareholders by underperforming over the last few years. Miller was particularly critical of the Fiber division’s diminished revenues and high costs.
The battles grew so nasty that on April 19, the Crown Castle Board of Directors said they would not add Steven Moskowitz to the Board when Mr. Moskowitz was appointed CEO/President because it wished to avoid the expense and distraction of a lawsuit that Ted Miller had filed to keep Mr. Moskowitz off the Board.
Although Crown Castle beat the consensus estimates on AFFO and revenue in its first quarter 2024 operating results, both financial measures were well below the numbers from Q1 2023. It also didn’t help the share price when on May 30, James Cramer of “Mad Money” recommended avoiding Crown Castle, noting that it’s been mismanaged.
Not surprisingly, Crown Castle’s short interest has recently risen by 11.9%.
Takeaway: Crown Castle shares traded near $188 in early January of 2022. Crown Castle was trading at $99.09 on Thursday morning of this week. Shares of Crown Castle were trending a little over 1% higher after the announcement, but the excitement didn’t last very long. Ted Miller and Elliot Investment Management gave it quite a nudge to wake up, but this REIT still has much to prove before investors will have the courage to purchase it again.
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.
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