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📈 Biggest Winners This Week: Hotel stocks performed stronger this week.

• American Strategic Investment Co (NYSE: NYC) Up 29.25%

• DigitalBridge Group Inc: Up 5.85%

• Sunstone Hotel Investors Inc (NYSE: SHO) Up 5.43%

• Braemar Hotels & Resorts (NYSE: BHR) Up 4.78%

• Summit Hotel Properties Inc (NYSE: INN) Up 4.51%

• Hudson Pacific Properties Inc (NYSE: HPP) Up 3.87%

• DiamondRock Hospitality Co (NYSE: DRH) Up 3.57%

📉 Biggest Losers This Week: Some office stocks stumbled this week

• Wheeler Real Estate Inc (NYSE: WHLR) Down 22.40%

• Office Properties Income Trust (Nasdaq: OPI) Down 19.54%

• Uniti Group Inc (Nasdaq: UNIT) Down 11.45%

• Innovative Industrial Properties Inc (NYSE: IIPR) Down 9.58%

• City Office REIT Inc (NYSE: CIO) Down 8.41%

• ARMOUR Residential REIT, Inc. (NYSE: ARR) Down 8.03%

• WP Carey Inc (NYSE: WPC) Down 7.14%

• Global Net Lease Inc (NYSE: GNL) Down 6.35%

• Ashford Hospitality Trust, Inc. (NYSE: AHT) Down 6.05

Prices as of September 28, 12:00 Noon

ONE BIG THING

WP Carey Drops A Bomb On REIT Investors

Briefly: In a stunning move on September 21, WP Carey Inc (NYSE: WPC) announced that its Board of Directors approved a plan to spin-off 59 office properties into a separate publicly-traded REIT called Net Lease Office Properties (NLOP). In addition, the board is creating an asset sale program to sell the 87 office properties still retained by WP Carey. The spin-off will close on or near November 1, 2023, and all properties in the asset sale program will be disposed of by January 2024. The board’s decision does not require shareholder approval.

Who They Are: WP Carey is a New York City-based diversified net-lease REIT, whose single-tenant properties include industrial, warehouse, office, retail and self-storage units. WPC was founded in 1973 and has traded on the New York Stock Exchange since 1998. In 2012, it was converted into a REIT.

Prior to the spin-off and sale, WP Carey had 1,475 net leased properties with approximately 180 million square feet across 26 different countries. Its portfolio includes 398 tenants from over 30 industries and an excellent occupancy rate of 99.0%.

Why This Happened: The main reason given by CEO Jason Fox was to improve the overall portfolio quality and metrics, including an increased weighting of warehouse and industrial assets. The company will use the proceeds of the spin-off and sale to reduce more than a billion dollars of debt and to fund new industrial acquisitions.

Fall Out": A big negative for shareholders was the announcement that a “dividend reset” will be made, once the transactions close. The specific dividend amount after reset was not provided, but WP Carey did say it will be 70%-75% of adjusted funds from operations (AFFO). The annual dividend of $4.28 prior to the announcement yielded 6.71% and the forward FFO payout ratio prior to the announcement was 81.2%. It’s been estimated that the dividend yield could be reduced by 1.5%-2%.

Unfortunately for investors, this will end WP Carey’s record of raising dividends for 99 consecutive quarters. To make matters worse, one week prior to the spin-off and sale, WP Carey announced it was increasing its quarterly dividend from $1.069 per share to $1.071 per share. That dividend is payable October 16 to stockholders of record September 29, with an ex-dividend date of September 28. It’s unaffected by the spin-off and sale.

Market Reaction: Wall Street was not happy at all with this move. The 59 offices that will comprise the Net Lease REIT made up about 10% of WP Carey’s annualized base rent (ABR) at the end of Q2 2023. The 9.2 million square feet of offices are primarily single-tenant net leases in the U.S., with a smaller number in Europe. In Q2 these properties generated $141 million for WP Carey. 70% of the properties sold were formerly leased to the Government of Spain with a 100% occupancy rate and an 11.5 year weighted average lease term (WALT) remaining. In other words, these offices were solid and reliable income producers. The 59 spun-off properties had a 97.1% occupancy rate with another 5.7 years of WALT remaining.

WPC stock dropped 8% in one day, and has continued falling ever since. The closing price prior to the announcement was $63.95 and its most recent price was $54.08. The suddenness of the announcement was like a bomb because if a dividend stalwart like WPC could end its 24 year consecutive run of dividend increases in an instance, what could that mean for the rest of the REIT universe?

Impact For Investors: For long term WPC investors, the announcement creates a double-edged sword. The dividend yield will decline and shares have now dropped precipitously from January 2023 when highs were near $83. But management is trying its best to convince investors that in the long term its decision to sell-off office properties in favor of industrials while paying down debt with the proceeds will be of major benefit to the company.

Time will tell. In the meantime, the stock will probably trade within the $52-$56 range for the near future.

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Finding Opportunity In Any Environment

BAM Capital has one of the most impressive track records of any real estate fund manager we’ve seen. On 12 exited assets, investors have realized an average IRR of 35.14% with an average hold period of 3.4 years.

Its latest fund, the BAM Multifamily Growth & Income Fund IV, aims to acquire Class A & B assets located near major economic drivers with a focus on Midwest markets with strong demographics and quality school systems.

Using the BAM Companies vertically integrated platform, the fund plans to drive revenue and create operating efficiencies by seeking opportunities that can benefit from organic rent growth or select renovations to justify future rent increases.

Visit BAM Capital’s website for more details or to view the fund’s offering memorandum.

UPGRADES AND DOWNGRADES:

Hudson Pacific Properties Inc (NYSE: HPP) September 26, BTIG analyst Thomas Catherwood upgraded Hudson Pacific Properties from Neutral to Buy and announced an $11 price target.

DigitalBridge Group Inc (NYSE: DBRG) September 28, JP Morgan analyst Richard Choe upgraded DigitalBridge Group and raised the price target from $19 to $25.

WP Carey Inc: September 26, BMO Capital analyst Frank Lee Downgraded WP Carey from Outperform to Market Perform and lowered the price target from $75 to $60.

Community Healthcare Trust Inc (NYSE: CHCT) September 22, Baird analyst Amanda Sweitzer downgraded Community Healthcare Trust from Outperform to Neutral and lowered the price target from $43 to $33.

REIT ROUND-UP

Pebblebrook Hotel Trust (NYSE: PEB) said its Same-Property revenue per available room decreased (RevPAR) by 1% in August, because of Tropical Storm Hilary and Hurricane Idalia, which caused over 200 bps of impact. The company said these storms caused weather-related cancellations, early check-outs, reduced short-term pickup, and one-time repair/clean-up and remediation expenses.

As a result, Pebblebrook Hotel estimates hotel revenues were reduced by $3.5 million, and hotel EBITDA was reduced by $2.5 million from late August through early September. Same-Property EBITDA declined 1%. Excluding the impact of the named storms, the company estimates that Same-Property EBITDA would have increased approximately 6% over the prior year period.

American Strategic Investment Co (NYSE: NYC) September 27, announced it has received a tender offer from Bellevue Capital Partners, LLC. to buy up to 350,000 shares of American Strategic stock at $10.25 per share. Prior to the announcement, the most recent closing price was $6.22, but shares blasted 30% higher on the news.

SL Green Realty Corp (NYSE: SLG) Completed its One Madison Avenue project and received $577.40 million in cash as a final equity payment from JV Partners.

Insider Purchases:

Agree Realty Corporation (NYSE: ADC) September 21, John Rakolta Jr., Director, purchased 30,000 shares of Agree Realty for $1,724,400. Mr. Rakolta now has control over a total of 360,056 shares of the company, with 360,056 shares held directly.

HOUSING NEWS BRIEF

The housing news continues to be negative, but somewhat mixed. August sales of new construction single-family homes fell 8.7% from July to August to a seasonally adjusted annual rate of 675,000, but year-over-year new home sales were up 5.8%. Increased materials and labor costs are impacting builders and interest rates above 7% threaten to hurt September home sales as well.

The single-family home inventory was 436,000 in August, a decline of 5.2% year-over-year. New construction made up almost 16% of all sales, but the median new-home sales price was $430,300, down 2% year-over-year. The price decline was due to builder incentives and slightly smaller homes being built.

The current housing conundrum should continue to boost the earnings of REITs that rent apartments and single-family homes, such as Mid-America Apartment Communities Inc (NYSE: MAA), AvalonBay Communities Inc (NYSE: AVB) and Invitation Homes Inc (NYSE: INVH). Nevertheless, Wall Street continues to punish the apartment REITs over concerns about new construction multi-family units being built. But with higher construction costs, those units are likely to command higher rents and are not likely to reduce demand for pre-existing, less expensive apartments or single-family homes.

However, homebuilder stocks like Lennar Corp (NYSE: LEN), DR Horton Inc (NYSE: DHI) and KB Home (NYSE: KBH) are continuing their decline. KB Home and DR Horton are both down approximately 18% since July. Lennar is down about 16%. This sector could continue to slide.

UPCOMING EX-DIVIDENDS:

ONE FOR THE ROAD

Insiders Snap Up Shares of MDRR

Who? Medalist Diversified REIT Inc (Nasdaq: MDRR) is a Virginia-based diversified REIT with five shopping centers and three flex/industrial properties, covering 851,282 square feet, across Virginia and the Carolinas, with a portfolio occupancy of 97.5%. Francis P. Kavanaugh has been the interim CEO since July 2023, replacing former CEO Thomas (Tim) Messier.

What Happened: Several Corporate insiders at Medalist Diversified REIT (Nasdaq: MDRR) have recently been buying shares of both the common and preferred stock, hand over fist.

Long Decline: Medalist Diversified has fallen from a split-adjusted $30 pre-COVID price to just $5.25 today.

It’s difficult to find the motivation to purchase the stock of a company that announced a 1-For-8 Reverse Stock Split in April in order to regain compliance with the $1.00 minimum bid price requirement to continue listing on Nasdaq. It’s even tougher to be enthusiastic when that same company announces a six-month dividend suspension, as Medalist Diversified did in July. To his credit, CEO Kavanaugh announced he would forgo any compensation during the six-month dividend suspension.

However, simultaneously, Medalist Diversified announced that it’s exploring diverse opportunities that might include mergers, investments, or other strategic combinations, in order to enhance shareholder value. And on August 9, the Board announced it would grant a waiver to Mr. Kavanaugh to be able to increase his common share ownership.

As reported on S.E.C. Form 4, since mid-August, several Medalist Diversified insiders have been purchasing large numbers of shares:

• August 17-18, Director Timothy O’Brien bought 2000 shares of common stock at prices ranging from $5.35 to $5.45 and 500 shares of Preferred stock at $22.

• August 17, Interim CEO and President, Frank Kavanaugh bought 1808 shares of Preferred Stock at $21.15 per share

• August 23, CEO/President Frank Kavanaugh bought 4,498 shares of Preferred stock at $21.4659 per share.

• August 25, Director Emmanuel D. Neuman purchased 2,074 shares of common stock at $5.2408 per share. On August 29, Director Neuman also bought 2,752 shares of common stock at $5.228 per share. Between August 30-September 1, Director Neuman bought another 4,207 shares at prices between $5.2224 to $5.25.

• August 31 and September 6, CEO/President Frank Kavanaugh bought another 2,817 shares of Preferred stock at prices between $22.75 and $22.9857.

• September 6-8, Director Neuman bought another 448 shares of common stock between $5.145 and $5.25.

• September 11-13, Director Neuman bought another 4,142 shares of common stock between $5.250 and $5.4513. Director Neuman now holds 13,623 total shares.

• September 22, CEO/President Kavanaugh bought another 2,500 shares of Preferred stock at $23.284. CEO Kavanaugh now holds $42,500 shares.

The Takeaway: The stock has performed miserably since January 2000, down almost 83%, although year-to-date it’s only down 2%. After the Board announced it will be exploring diverse opportunities, suddenly company insiders went on a buying spree to rival Walmart shoppers on a Black Friday morning. Are they buying just because the stock is cheap, or is there something in the air?

So, what does this mean for investors? As they say in Latin, “Nota bene” (observe carefully or take special notice), because there could be an important announcement forthcoming.

QUICK QUESTION

PRESENTED BY BAM CAPITAL

Finding Opportunity In Any Environment

BAM Capital has one of the most impressive track records of any real estate fund manager we’ve seen. On 12 exited assets, investors have realized an average IRR of 35.14% with an average hold period of 3.4 years.

Its latest fund, the BAM Multifamily Growth & Income Fund IV, aims to acquire Class A & B assets located near major economic drivers with a focus on Midwest markets with strong demographics and quality school systems.

Using the BAM Companies vertically integrated platform, the fund plans to drive revenue and create operating efficiencies by seeking opportunities that can benefit from organic rent growth or select renovations to justify future rent increases.

Visit BAM Capital’s website for more details or to view the fund’s offering memorandum.