Undervalued REITs: Finding Opportunities in Commercial Real Estate

During their recent episode of the Acquirers Podcast, Travis and Carlisle discussed Undervalued REITs: Finding Opportunities in Commercial Real Estate. Here’s an excerpt from the episode:

[Tim] It’s earnings season, and so you often see prices on shorter-term options that are a little more elevated just because of the uncertainty that can occur there. A few stocks that are trading at really large discounts to where they’ve been in a while are Agree Realty, which is ticker symbol ADC. They reported earnings that were pretty good, actually.

But that stock is priced at around $65 per share now. It’s about 13 times cash flow, and it pays about a 5% dividend that’s monthly. It’s just really high quality.

They have $2 billion of liquidity. Occupancy is over 99%. Their tenants are Home Depot, Lowe’s Home Goods, really, really high-quality tenant list, and they’re small enough that they can grow at a pretty good rate.

Then one of the things that some of these real estate companies are doing, it was just announced, UDR is an apartment REIT, and they just announced a partnership with Apollo where they sell a portion of, in this case, apartment properties. They sell it at a reasonable cap rate, and then Apollo can provide additional funds for growth, probably at a lower cost of capital and not as much leverage to the balance sheet. Realty income is doing the same type thing, where they’re outsourcing or taking in third-party capital and managing it and using their skill in development and stuff.

I think, look, if you believe in real estate, commercial real estate, and let’s forget about office space, let’s just talk about normal commercial real estate, and if you have a five-year time horizon, now is a really attractive time, unless you think that it’s going to be 1970s, 1980s inflation and higher interest rates that just last for so long. I am a firm believer that AI ultimately will be deflationary. I think that it’s a shame, honestly, because the memory and the compute and the energy is being pushed so high through the wars and then through the AI demand, but I think that some of the efficiency gains are being lost.

[Tobias] Yeah, for sure. I saw an interesting stat. This is residential real estate, so it’s not directly related, but just a reminder, as you were talking about it, residential real estate transactions and mortgage origination have fallen through the 2008-09 lows, which is a great financial crisis.

Now, the data only goes back to 2001 in the chart that I saw, but it’s lower than at any other point in 25 years, which speaks to… I mean, there’s various different theories about why that might be. One is that rates are too high, but the other is that- I’ll go with that theory.

Or house prices are too high. That’s the other one, that house prices have to reset a little bit lower, because mortgage rates are seven, a little bit north- Eight, probably. High sevens and eights, I’d imagine.

I was going to say seven high. Yeah, so that is much higher than it was five years ago. They’ve gone up a great deal over five years, but house prices haven’t really corrected down to match the payments.

House payments are about twice what they were five years ago. Now, that might’ve been low, but it’s clearly creating a problem where those transactions aren’t going through, and then that has flow-on effects for the economy too, because there’s no household formation and appliances don’t get purchased and so on. People don’t go through all the other things that they do when they form households.

Look at Whirlpool stock.

[Tim] Look at Whirlpool, man, or builders and the cabinet makers. I mean, that whole sector is demolished. And yeah, once again, if you ever want to be bullish on that area of it, but yeah, you named it.

It’s higher interest rates. It’s too high of prices. And people don’t like the prices, so then they’re just taking it off the market.

That’s a big part of it. And then you have that contingent of homes that are locked in and that they’re just never going to get rid of their mortgage rates. But then you’ve talked to, I have friends that I play pickleball and they’re trying to buy in California and in Orange County.

And they just, as soon as they bid on a house, it’s sold and they can’t get insurance anyways. So when they actually find a house that they might have a chance on, it’s really hard to get fire insurance. Is that right?

[Tobias] Oh yeah.

[Tim] Oh yeah. Yeah. Where I lived in Orange County, it was really hard.

I had state farms, so state farm was good. They would keep you if they had you, but then I believe they left the state. Could be wrong, but I believe they left the state for home insurance because of all the wildfires.

[Tobias] But it’s a good example of a part of the market that’s not going to be, maybe it’s impacted by AI in the same way that all of these businesses were impacted by the internet. They all ended up with websites, but it might be impacted by AI, but it’s probably people are going to keep on buying dishwashers and washing machines and dryers and all of those sort of things. They’re going to keep on going to Home Depot.

They’re going to keep on doing all of these things. Maybe you’re going to have your muse assistant go and make the purchase for you, but you’re still going to be buying all of these things. So I think there are lots of opportunities around that are like that, where they’re probably in a little bit of a cyclical low or the cyclical droop because there’s other macro factors, but the cycle turns, it always turns.

And the time to buy it is when the prices are low. So that’s one of the things about being a value guy. You’ve got to go in there when it looks ugly and buy believing that things are going to get better in the future.

And I think that there’s a large part of the or a large part of the companies that make up the index, particularly in the mid cap and small cap, but very modest assumptions for what they do in the future. And they’re really undervalued. And I think we’ll see, it always takes a year or so, 18 months for it to kind of work its way through.

But I think it’s an interesting time. It’s a good time to be a value guy, good time to be an intelligent investor.