The S&P 500 Real Estate sector stock price index is down 4.4% ytd through Tuesday’s close, making it the fourth worst performing of the 11 S&P 500 sectors (Fig. 9).
Here’s how the sectors stack up ytd: Technology (13.6%), Consumer Discretionary (13.3), Energy (3.5), S&P 500 (3.3), Health Care (2.7), Financials (-2.0), Materials (-3.2), Industrials (-3.4), Real Estate (-4.4), Utilities (-4.7), Consumer Staples (-10.6), and Telecom Services (-11.9).
The industries dragging the Real Estate sector into negative territory include: Health Care REITs (-9.9%), Retail REITs (-7.8), Office REITs (-6.1), Residential REITs (-4.6), Specialized REITs (-3.4), and Industrial REITs (-0.3).
Only two industries in the sector are in positive territory: Real Estate Services (12.5) and Hotel & Resort REITs (6.4) (Fig. 10). The drop in real estate stocks left the average REIT trading roughly 7% below the value of its underlying real-estate holdings, compared to the 2.3% premium these investments have averaged since 1990, a 6/18 WSJ article reported.
Investors who once turned to the Real Estate sector for yield can now get almost as much from a 10-year US Treasury note.
As a result, “fund managers who actively manage their portfolios have already cut exposure to the real-estate sector to a six-month low,” the above-mentioned WSJ article reported, citing a Bank of America Merrill Lynch report.
Is it time to go shopping? Well, some of the industry’s largest players are snapping up REITs of all varieties, often at prices below net asset value.
Here’s a quick look at some recent transactions:
(1) Student housing. Greystar Real Estate Partners is in discussions to buy Education Realty Trust, a student housing owner, for about $3.1 billion, a 6/13 WSJ article reported. Greystar manages more than 400,000 apartment units in the US and abroad, and Education Realty owns and manages facilities at 50 universities across 25 states that offer more than 42,300 beds, both on-campus and off-campus. This would make deal number two for Greystar, which purchased apartment REIT Monogram Residential Trust with partners last September.
(2) Swapping hotels. Blackstone Group will purchase for $4.8 billion, including debt, LaSalle Hotel Properties, a REIT that owns 41 luxury hotels that are operated by other hotel companies. The offer for $33.50 a share will be paid in cash and represented a 35% premium to the company’s share price of $22.84 before deal talk hit the market and a 13% premium to the analysts’ consensus net asset value of $29.64 per share. The deal follows Blackstone’s exit from another hotel investment, Hilton Worldwide Holdings, which went public this year.
(3) Gone shopping. In May, France’s Unibail-Rodamco acquired Westfield, a shopping mall REIT, for $24.7 billion. Together, they’ll create the world’s second-largest mall owner as measured by market value. The deal extends Unibail-Rodamco into the US and London, where Westfield developed properties like New York City’s World Trade Center and Century City in Los Angeles. In total, Westfield owned 35 shopping centers across the US and the UK. Press reports put the capitalization rate for the deal at around 4% to 5%. The “cap rate” is the properties’ annual income compared to its original cost.
In addition, Brookfield Property Partners bought the 66% stake of GGP it didn’t already own at $23.50 a share. A 3/27 article in the WSJ reported at the time of the deal that the price was below expectations. “In a research report Tuesday, analysts at BTIG pointed out that Brookfield’s ‘wholly inadequate’ offer values GGP at a 21.9% discount to what the company would be worth if its properties were sold separately. ‘Why should the shareholders gift that arbitrage to Brookfield and award a very valuable management fee stream to Brookfield Asset Management shareholders in the process?’ the report asked rhetorically. But others noted that at this juncture, the shareholders of the REIT have little choice since there are no other bids.” The cap rate for the deal was reported to be 6.0%.
(4) Deals for industrial properties too. Prologis, the world’s largest owner of distribution centers and logistics properties, agreed in April to buy DCT Industrial Trust for $8.4 billion including debt. DCT is a REIT that owns industrial properties. The deal valued DCT shares at $67.91, a 16% premium over DCT’s share price before the deal’s announcement.
The demand for these properties has risen along with online shopping volumes, a 4/29 WSJ article reported. “Rental rates in industrial real-estate markets have been growing at a more-than-5% annual rate in each of the past seven quarters, as demand outpaces supply, according to real-estate broker CBRE Inc. The firm said the 7.3% availability rate for warehouse space in the U.S. in the first quarter was the lowest in 17 years.”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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