There is Something Rotten in REITland

REIT stocks aren't working and they haven't been working for years. The performance of the shares since 2016 have been just plain ugly. Some of this is due to the fact that  underlying real estate values have declined in the office and mall spaces.  The technological disruptions caused by e-commerce and work from home have certainly exacted a toll on those markets. So if you add leverage into the mix, it makes for a precipitous decline in valuations. On the flip side, the industrial sector became a huge beneficiary of e-commerce with values up 75%. However, apartment values, according to Green Street Advisors, are up by about 10% since 2016 and strip retail values are essentially unchanged, while the share prices in those two sectors are down over the eight year period.

As many of you know I have a long history in real estate and REITs going back to the 1970's when I penned my Ph.D. dissertation on REITs. Although I have long since left sell-side research and my stint at running the Real Estate Securities program and the University of Wisconsin, I still have more than a passing interest in the space. Presented below is the performance of what I perceived to be quality large cap names while I was a practicing analyst. I also include the performance of the newer tech related REITs in the data center and cell tower markets who have done far better than the more traditional REITs. (See Table 1) I would also note how well the storage stocks and the Sunbelt oriented apartment stocks have done compared to those REITs focused on the over-owned coastal markets.

Table 1. The Performance of Selected REITs, 2016 High - April 13, 2023

Sector/REIT                 2016 High         Apr. 13, 2023        % Change

Office         

Boston Properties            144                       52                      -64%                      

Highwood Prop.                53                       23                      -57

Kilroy Realty                    77                        30                      -61

SL Green                        128                        23                      -82

Vornado                           90*                       15                      -83

*-Adjusted to the JBG Smith spin-off.

Apartment        

AvalonBay                      192                       170                     -11

Camden Property             91                        104                    +14

Equity Residential            82                         60                     -27          

Essex Property                240                       211                     -12

Mid-America                  110                       147                      +34

UDR                                 39                         40                       + 3

Strip- Retail    

Federal Realty                 171                         97                     -43

Kimco Realty                    32                         19                     -41

Regency Centers               85                         60                     -29

Mall      

Macerich                           96                         10                     -90

Simon Property               229                        109                    -52

Industrial    

Prologis                             55                        122                  +122

Hotel   

Host Hotels                        20                         16                    -20

Storage     

Extra Space                      95                         159                    +67

Public Storage                278                         305                    +10

Healthcare   

Ventas                              77                           44                     -43

Welltower                        80                           75                      - 6

Tech Related       

American Tower            113                         211                     +87

Digital Realty                 113                          92                      -19

Equinix                          391                         709                     +81

Given this rather poor performance of real estate in the public markets, it is puzzling to see that major institutions have just thrown a record $30 billion at the new Blackstone Real Estate Fund. For whatever reason, investors seem to prefer their real estate in a private wrapper rather than a public one. Perhaps some of that money will find its way into taking private several of the REITs mentioned here that are selling well below analyst estimates of net asset value. I recently spoke to someone very knowledgeable in this regard, and he noted that despite the price declines, the stocks are not cheap enough to entice a deal. But should interest rates drop as the markets now anticipate, that situation could very well change.

To me there is one lesson to be learned here. Investors have to be more cognizant what REIT managements are doing with respect to capital allocation, leverage and executive compensation. It seems that there has been quite a bit of leakage between the underlying performance of the real estate and the returns earned by REIT shareholders.

The Dice are Rolling in Mall Land

Last May we wrote "Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off." (https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations-part.html) Of a sudden, after a long period of sustained discounts to Street estimates of net asset value the dice are starting to roll in Mall Land. First Brookfield Property Partners offered to take in the 64% of GGP that it doesn't already own with a  cash and stock offer valued at $23/share. To be sure the offer was well above the $19/share the stock was trading at, but still well below the $28/share of value ascribed by the Street. As of this writing GGP is trading about 3% above the Brookfield offer price.

We then found out that hedge funds Starboard Value and Third Point have taken a position in Macerich causing its stock to rise from the mid-50s to the mid-60s, still below the $73 valuation estimated by the Street. Further Elliott Management, a $30 billion hedge fund, has taken a position in Taubman that elevated its stock price from the high 40s to the mid-50s again well below the $85 Street valuation. Remember the hedge funds are intermediaries and are ultimately looking for a final buyer like Brookfield to take them out. If no final buyer appears they will find themselves with dead money positions that will be sold back to the market.

Sitting on the sidelines watching and waiting are David Simon of Simon Property Group, the largest mall owner and Jonathan Gray of Blackstone, the largest private equity firm in the real estate arena. How they respond could very well be despositive as to how the price discovery process works out.

My guess is that the potential buyers of mall companies and/or mall assets are looking for what they perceive to be a bargain and with the Street still estimating mall cap rates in the 4-5% range, they will not find a bargain at those prices. Simply put the bid-offer spread is too wide, and as result I do not foresee transactions at anywhere close to the offer side of the market. But again, as we noted in May, time will tell.