Do you like long-winded articles? This one is for you.
Some REITs are great. Some REITs suck. Almost all countries are facing at least some difficulty from rising interest rates. Most businesses also struggle with higher interest rates.
I don’t like high-profile The quality of my permanent posts is also low. Thanks, I’ll do my best. However, mixing it up for an article sounds good.
The REITs that I consider bad are generally those that are more likely to generate weaker long-term returns for shareholders. However, some of these REITs can still make a difference if they create good deal opportunities. So, the least attractive REITs for me:
- there is a significant risk and
- There are no liquid assets that can drive prices towards net asset value (NAV).
A good REIT has characteristics that are likely to deliver strong returns over the next decade.arrive To be clear, stable doesn’t mean 12% to 20%. Long-term returns of this magnitude are very rare. Most companies that generate such high returns benefit from factors such as using governments to prevent competition.
Unless we allow inflation to continue to heat up, the market as a whole will not generate returns anywhere near that level in the long run. It is simply impossible for the market to actually return anywhere near this level. Income cannot compound faster than GDP forever. Why? Because income is a fraction of GDP, income can never consistently exceed total income. That’s so stupid.
So what you’re looking for is a REIT that generates consistent income growth. This is the first step. Then they need to be able to translate revenue growth into AFFO per share. A portion of the AFFO should be paid out in dividends, but we value the cash the REIT keeps (for our benefit) rather than just focusing on what they decide to hand over to us.
If you own 50 apartment buildings, and you have a big manager who wants to keep some cash to build apartment building 51, you probably don’t call him an idiot for wasting your cash. Well, with interest rates this high, you probably do. But most of the time, you’ll see an additional apartment complex as an increase in wealth.
Now let’s talk about REITs.
Is Hudson Pacific Properties (HPP) finally cheap?
Maybe, but this is a tradeable stock. The last dividend increase was in 2017, from $0.20 to $0.25 per share. They recently cut their dividend from $0.25 per share to $0.125 per share. Not very good.
Are they consistently building NAV per share? No. However, ahead of 2020, they haven’t been particularly bad at it. I wouldn’t call it a “bad REIT,” but I’m still uncomfortable with office real estate. The chart below compares the share price to consensus NAV:
The last time the stock traded above NAV was in early 2015. Another disturbing thing is that analysts are terrible at updating consensus NAV. It doesn’t really plummet until the end of June 2022. Sorry, analysts, this is a terrible job. too late.
Next up is Terreno Realty (TRNO). TRNO is an industrial real estate investment trust. You will notice that they are often trading at a premium to their NAV. Around mid-2022, the consensus forecast starts to decline. However, these estimates bottomed out in early 2023 and have been rising since then:
TRNO definitely has the hallmarks of a great REIT. outstanding balance sheet. Great management. Strong corporate governance (often accompanied by good management). These factors make it easier to raise capital and buy real estate with value added.
As industrial REITs, they also have huge lease spreads. This drove strong same-property NOI growth, which in turn drove FFO and AFFO per share growth.
What do they have? They don’t have high dividend yields or the low multiples that investors have been told to focus on. Investors are buying this stock for growth over the next decade, not for the current dividend yield.
American Homes 4 Rent (AMH) is a good REIT. Maybe a great REIT. Valuations are very interesting, as are consensus NAV estimates.
Are house prices rising or falling? It depends on where you live.
Prior to 2019, AMH’s consensus NAV growth was very slow. Going into 2022, equity value is going up a lot because everyone knows home prices are skyrocketing and AMH owns single-family homes.
However, the consensus NAV numbers also look a bit interesting here:
See how the consensus NAV is dropping? The sharp decline towards the end of the year begins around the beginning of November 2022.
Was that when house prices fell? The Case-Shiller index doesn’t think so:
That doesn’t quite match the change in the consensus estimate. For now, the index is at an all-time high, albeit a modest gain.
Which is pretty interesting considering the rise in interest rates. I didn’t expect house prices to remain so strong.
The Central American Apartment Community (MAA) owns the apartments. obviously. They don’t have an apartment in California.
In which cities are house prices falling the most?
You can reasonably assume that there is some connection between house prices and apartment prices, since both are related to demand. If so, you might think that MAA should do just fine. They own residential real estate (apartments), but they don’t own that real estate in most of the states with the biggest declines.
However, the consensus forecast disagrees.
Want to see the craziest charts? certainly. Industrial Logistics Property Trust (ILPT) made a big acquisition ahead of the rate spike. Bad timing and bad REITs. Combine the two and you get this beauty:
How scary is that? The consensus NAV is $31.28 and the stock price is $4.70. Leverage makes forecasting difficult, but it’s clear that analysts are far behind in updating the impact of lower leverage.
Do I like these REITs? certainly. I think MAA and TRNO are very attractive. My bullish outlook for MAA is $146.35 and TRNO is $61.04.
Expected new apartment supply in 2024 will put pressure on MAA’s lease spreads, but the problem should reverse sometime in 2026. At the same time, I still think this is a very good or great REIT, and it’s trading at a substantial discount to consensus numbers. That consensus might even be a little low. However, we do not want to turn a blind eye to the difficulties they will face next year.
Terreno is one of my larger posts. I expect industrial rents to grow significantly over the next decade. Higher interest rates create further headwinds for new supply. There will be more supply on the market in 2023, but the supply should be significantly reduced. We expect demand for industrial real estate to continue to increase as more sales shift to e-commerce, requiring more industrial real estate per dollar of sales. When supply grows slower than demand, it pushes up rents.