We listen when they speak because they have the best track record in real estate investing. We’ve talked a lot about REITs lately.
“In real estate, the public REIT index (VNQMore) were down 17% in Q4, while Core+ funds were up 2.3%. i will do it again for you The index fell 17% and rose 2.3%. “ Blackstone CEO Steve Schwartzman.
“Today’s best opportunity is clearly in the open market on screen, and we spend a lot of time there.” Blackstone COO John Gray said:
Both of these executives are self-made millionaires who have made their fortunes in real estate asset management. Many see them as the Warren Buffett equivalent of real estate investing, so these statements shouldn’t be taken lightly.
And not just chatter!
By 2022, we have acquired four different REITs for a total of about $30 billion. Since then, the stock has only fallen, and we expect more acquisitions in the next few quarters.
Blackstone is not alone.
Their biggest rival, Brookfield Asset Management (bamLed by self-made billionaire Bruce Flatt) are also aggressively targeting bargain REITs.
For those unfamiliar with Brookfield, Brookfield is the world’s second largest private equity firm with $750 billion in assets under management, more than a third of which is real estate.
His strategy is simple; He looks for real assets that are temporarily undervalued due to short-term concerns that have no real impact on long-term fundamentals. Simply put, he is a value investor primarily focused on real estate, infrastructure, energy and renewable energy.
What is he buying these days?
As you might have guessed, it’s a REIT.
Early in the pandemic, Bruce Flatt was already very vocal about the opportunities in the REIT sector. In late 2020, he I got it that:
“Perhaps the biggest discount between what you see as value and price is in REITs and real estate securities… I think one of the great buys today is real estate securities. Trade them in the private sector. Will…REITs with high-quality assets trade at a significant discount to the tangible value of the assets.”
Shortly after, he took Brookfield Property Partners (BPY) private in a $5.9 billion deal in 2021.
In late 2021, Brookfield also purchased a stake in British Rand (OTCPK: BTLCY), one of the largest REITs in the UK and heavily discounted to NAV.
They didn’t stop there.
It then took three other European REITs private in early 2022. Alstoria, the largest of the three, is a German office REIT purchased for €4.1bn. Interestingly, they actually paid a premium for his NAV, and since then both the German office REIT and the Euro have collapsed.
It also purchased the Irish office REIT Hibernia for €1.1bn and the Belgian office REIT Befimmo for a further €1.4bn.
That equates to €7 billion worth of European REIT buyouts in 2022 alone!
Then in July I signed a bigger deal. Partnership with DigitalBridge (DBRGMore), they bought a 51% stake in Deutsche Telekom’s cell tower business (OTCQX: DTEGF, OTCQX:DTEGY), valuing it at €17.5 billion. KKR (KKR) was also a bidder for the deal, but fell short of Brookfield’s offer.
Finally in a recent interview bloombergBrookfield said he has invested $110 billion in cash to see “many opportunities” in the public market for privately traded undervalued public companies.
“There’s never been a better time to be a value investor. “ Anuj Ranjan, Global Head of Business Development, Brookfield
So clearly they have the same idea as Blackstone.
What are they seeing in the REIT market that others miss?
It’s actually pretty easy.
Valuations are heavily discounted, with many REITs trading at just half the value of the properties they own, net of debt. Even if asset values remain roughly the same in 2022, they’re heavily discounted as stock prices have plummeted.
REITs have sold off heavily due to concerns about rising interest rates, but what the market seems to miss is that REITs use very little debt and have long maturities. Therefore, in most cases the negative impact is not significant. Moreover, interest rates are only rising because of inflation. This is very beneficial for REITs as it leads to higher rents and replacement values. In many cases, the positive impact of inflation outweighs the negative impact of rising interest rates, which is why more than half of REITs have actually raised their dividends in his 2022 despite falling stock prices. I can explain.
It is likely that a lot of money was withdrawn from REITs, as retail investors generally view REITs as a source of income. With US Treasury yields now above 4%, there are other options and REIT stock prices have fallen significantly.
However, this does not mean that private land prices will fall. In fact, NOI has continued to rise rapidly, and cap rates have also increased slightly, so prices have not changed much so far.
as me lately murmuredREIT investors seem to have forgotten about inflation, but private equity investors have not.IEF) gives a negative 5% return after tax and inflation. This is not sustainable for most investors. This is why most landlords are reluctant to sell their assets and move them into the Treasury or Bonds. It also explains why cap rates and asset values don’t differ much. Real estate provides much-needed inflation protection these days. This is why investors are willing to accept lower spreads/returns to get it.
Private equity players understand this and this is why they are investing in REITs that are heavily discounted.
But there are over 200 REITs out there, and even more if you include the international market.
What are the best opportunities?
At High Yield Landlord, we invest heavily in REITs that are potential buyout targets for private equity players such as Brookfield and Blackstone.
A good example is BSR REIT (OTCPK:BSRTF / HOM.U) owns a highly attractive apartment community in a Texas city where rents are rising rapidly. The price is now nearly 40% off his NAV, and the board recently approved a buyback plan to create value for shareholders.
An ideal buyout target for most private equity players, but large apartment REITs like AvalonBay (AVB) because it’s hard to find a Texas community portfolio these days, especially at heavily discounted fair value.
In addition to buyout opportunities in the US, we are also buying dips in Europe.
Brookfield invested heavily in European REITs in early 2022, but since then the euro has collapsed and European REIT shares have halved.
There is a lot of uncertainty in the short term, but if you have a long-term view, this is a great opportunity to buy a property at a steep discount to its long-term fair value. Some of his REITs in Europe are currently trading at $1.30.
“Every crisis we go through is always the worst crisis we’ve ever had. If you plan for the long term, these things come and go. Take advantage of these situations.” You can.” Bruce Flatt, Brookfield CEO, September 29, 2022
This quote perfectly illustrates why Bruce Flatt and Brookfield are investing in REITs today. They offer the opportunity to buy properties at a significant discount to fair value for short-term concerns that will be forgotten in a few years.
Real estate never goes anywhere and good properties always recover and continue to be highly appreciated in the long run.
In some ways, buying a REIT today is like buying a home after the Great Financial Crisis. They were already heavily discounted, but few people dared to buy for fear that prices would continue to fall. It was a big success inside.