Cognitive dissonance has hit the real estate market as people simultaneously love real estate and hate REITs. Physical real estate properties are presently selling for all-time highs while the REITs that own them are selling at fear mongering, recession level multiples. We discussed the cheapness of share prices more thoroughly here, but today I want to discuss the expensiveness of the physical real estate.
When these two facts are put together it creates a rather odd opportunity in which one can buy a REIT at 70 cents on the dollar and then sell its assets at full price.
Allow me to begin by taking a look at a variety of actual real estate transactions.
Real world transactions
The office market has been written off as dead, but big money has come in and paid quite a price tag in the recent SL Green (SLG) Office sale.
“New York City’s largest office landlord, said on Monday it sold a 49.9% stake in 245 Park Avenue to a U.S. affiliate of Mori Trust Co. Ltd. at a gross asset valuation of $2.0B.”
I highly doubt Mori Trust spent a billion dollars without doing extensive homework. This particular deal came in at about flat to SLG’s cost basis, but that is far better than what the market is pricing in.
Office is of course the most fundamentally troubled REIT sector and as we move on to other sectors I think it is clear that real estate values are up substantially.
“It has completed the sale of an unfarmed parcel in Florida for $9.6 million. This provided a 343% return on investment and resulted in a capital gain of approximately $6.4 million.”
As this particular land was unfarmed it had no revenues associated with it making the sale clearly accretive to shareholder value. The 343% return on investment was made possible by the HBU style of the sale as this land was well located for development. As such it is not indicative of general farmland throughout the country.
However, a series of sales from Farmland Partners (FPI) demonstrates that farmland has broadly appreciated to all-time highs even when it is sold to remain as farmland.
“Farmland Partners Inc. announced that it sold 862 acres of farmland in White County, Arkansas, for $3.7 million – an approximate gain of 24% over net book value.”
announced that it sold 2,426 acres of farmland in Nebraska and South Carolina to the tenants who rented the properties. The transactions totaled $16.2 million and represented a total gain on sale of more than $3.1 million, or approximately 24% over net book value.”
announced that it has sold 1,370 acres of farmland stretching across four farms in Arkansas, Georgia, Illinois, and South Carolina. The transactions totaled $8.9 million and resulted in a cumulative gain on sale of $3.7 million – approximately 73% over net book value.”
“farmland transactions include sale of ~$19.9M worth of seven farms, which helped the company achieve a gain of more than 26%.”
Keep in mind that in GAAP accounting, farmland does not depreciate. So a 26% gain on sale literally means they sold it for 26% more than they bought it for.
Life Science Real Estate Gains
Alexandria (ARE) has been an active seller to internally fund its development pipeline. Even as ARE stock is surrounding by doom and gloom, the company’s AFFO/share continues to rise at a good clip, rental rates are increasing and their disposition activity shows a clear demand for life science real estate.
S&P Global Market Intelligence
That is $1.015 Billion of sales at an average sale price of $989 per square foot and a cap rate in the high 4s. Why might one buy at a cap rate in the 4s when parts of the Treasury curve are north of 5%?
Because the buyers anticipate long term growth.
Multifamily real estate
Apartments have raised rents substantially over the past few years which has taken property values to close to all-time highs.
Armada Hoffler (AHH) sold Annapolis Junction for $150 million. Records show a cost basis of $83.6 million highlighted below.
S&P Global Market Intelligence
The sale price represents a 4.2% exit cap rate.
Industrial
So far it has been REITs selling, but in this instance, it is a REIT buying. Prologis (PLD) recently bought $3.1B of industrial real estate at a 4% cap rate.
“Prologis to acquire nearly 14 million square feet of industrial properties from opportunistic real estate funds affiliated with Blackstone for $3.1 billion, funded by cash. The acquisition price represents an approximately 4% cap rate in the first year and a 5.75% cap rate when adjusting to today’s market rents.”
In all of these examples there is a recurring theme I am wanting to drive home. In every case it is a very well capitalized buyer who is under no obligation to transact.
Forced sales happen frequently and can result in adverse pricing.
Forced buys don’t really happen.
In each case, it is a sophisticated buyer coming in and after extensive underwriting they determine the properties will generate ample return even at these all-time high prices.
There is nobody on the planet that knows more about industrial real estate than Prologis, so if they are willing to buy today at a 4 cap, it makes me feel great about owning STAG Industrial (STAG) at a 6.5% FFO yield and owning Plymouth Industrial (PLYM) at an 8.1% FFO yield.
The gap between REIT pricing and real estate pricing
As of 6/28/23, the median REIT trades at 77% of net asset value (NAV). Some are trading at half of NAV. The market justifies this discount by saying property prices have come down since the most recent NAV estimates, but that just isn’t the case. Every week I see new transactions coming in at all-time high prices. I would estimate the new average is closer to 75% of today’s NAV.
With the rise in interest rates, cap rates are rising. The market has misinterpreted this to mean that NAV’s are falling.
Recall that NAV is net operating income divided by cap rate. So yes, the denominator is higher now, but so is the numerator. Rental rates are up across 18 of the 20 real estate sectors (office and malls are flattish in rent with occupancy down making NOI down). The rest are up in NOI.
The higher NOI balances out the higher cap rates and in the stronger sectors more than balances out the cap rate delta.
So what has happened is REITs have sold off while real estate continues to appreciate in value. The result is an enormous gap between stock prices and the value of the underlying assets.
How to take advantage of the dissonance between REIT pricing and real estate pricing
Leveraged buyouts (LBOs) will resurface in popularity. Private equity or other well capitalized entities are likely to start coming in, buying the discounted REITs and selling their properties to net the delta between NAV and market price.
As individual investors, the LBO business model is not feasible to execute. There are, however, some other ways to do it.
1) Buying REITs that LBO themselves.
Farmland Partners is actively selling assets and using the proceeds to buy back its stock. Last I calculated, it has bought back close to 1/3 of outstanding shares by selling assets at a premium to NAV and buying shares back at discounts to NAV ranging from 55% to 25%.
SL Green is another company LBOing itself. I still view office as too risky to want to do it personally, but for those who feel they can understand the trajectory and have the stomach for risk it could be quite opportunistic.
2) Buying REITs that are positioned to be subject to M&A
Top of our list for REITs positioned to get bought out are Plymouth Industrial, Global Medical REIT (GMRE), Broadstone Net Lease (BNL) and one of the cheap grocery anchored shopping center REITs, Brixmor (BRX), or Kite Realty (KRG).
3) Patience
Eventually, market prices move to intrinsic value. The patient investor can buy high quality discounted assets and wait until prices reflect asset values. Whether it takes months or years is unknown, but I am happy to collect dividends while I wait.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
MONTREAL – The Quebec Professional Association of Real Estate Brokers says Montreal-area home sales rose 9.3 per cent in August compared with the same month last year, with levels slightly higher than the historical average for this time of year.
The association says home sales in the region totalled 2,991 for the month, up from 2,737 in August 2023.
The median price for all housing types was up year-over-year, led by a six per cent increase for the price of a plex at $763,000 last month.
The median price for a single-family home rose 5.2 per cent to $590,000 and the median price for a condominium rose 4.4 per cent to $407,100.
QPAREB market analysis director Charles Brant says the strength of the Montreal resale market contrasts with declines in many other Canadian cities struggling with higher levels of household debt, lower savings and diminishing purchasing power.
Active listings for August jumped 18 per cent compared with a year earlier to 17,200, while new listings rose 1.7 per cent to 4,840.
This report by The Canadian Press was first published Sept. 6, 2024.
In the quest to find cities where renters can enjoy the best of all worlds, a recent study analyzed 24 metrics across three key categories—Housing & Economy, Quality of Life, and Community. The study ranked the 100 largest cities in Canada to determine which ones offer the most to their renters.
Here are the top 10 cities that emerged as the best for renters in 2024:
St. John’s, NL
St. John’s, Newfoundland and Labrador, stand out as the top city for renters in Canada for 2024. Known for its vibrant cultural scene, stunning natural beauty, and welcoming community, St. John’s offers an exceptional quality of life. The city boasts affordable housing, a robust economy, and low unemployment rates, making it an attractive option for those seeking a balanced and enriching living experience. Its rich history, picturesque harbour, and dynamic arts scene further enhance its appeal, ensuring that renters can enjoy both comfort and excitement in this charming coastal city.
Sherbrooke, QC
Sherbrooke, Quebec, emerges as a leading city for renters in Canada for 2024, offering a blend of affordability and quality of life. Nestled in the heart of the Eastern Townships, Sherbrooke is known for its picturesque landscapes, vibrant cultural scene, and strong community spirit. The city provides affordable rental options, low living costs, and a thriving local economy, making it an ideal destination for those seeking both comfort and economic stability. With its rich history, numerous parks, and dynamic arts and education sectors, Sherbrooke presents an inviting environment for renters looking for a well-rounded lifestyle.
Québec City, QC
Québec City, the capital of Quebec, stands out as a premier destination for renters in Canada for 2024. Known for its rich history, stunning architecture, and vibrant cultural heritage, this city offers an exceptional quality of life. Renters benefit from affordable housing, excellent public services, and a robust economy. The city’s charming streets, historic sites, and diverse culinary scene provide a unique living experience. With top-notch education institutions, numerous parks, and a strong sense of community, Québec City is an ideal choice for those seeking a dynamic and fulfilling lifestyle.
Trois-Rivières, QC
Trois-Rivières, nestled between Montreal and Quebec City, emerges as a top choice for renters in Canada. This historic city, known for its picturesque riverside views and rich cultural scene, offers an appealing blend of affordability and quality of life. Renters in Trois-Rivières enjoy reasonable housing costs, a low unemployment rate, and a vibrant community atmosphere. The city’s well-preserved historic sites, bustling arts community, and excellent educational institutions make it an attractive destination for those seeking a balanced and enriching lifestyle.
Saguenay, QC
Saguenay, located in the stunning Saguenay–Lac-Saint-Jean region of Quebec, is a prime destination for renters seeking affordable living amidst breathtaking natural beauty. Known for its picturesque fjords and vibrant cultural scene, Saguenay offers residents a high quality of life with lower housing costs compared to major urban centers. The city boasts a strong sense of community, excellent recreational opportunities, and a growing economy. For those looking to combine affordability with a rich cultural and natural environment, Saguenay stands out as an ideal choice.
Granby, QC
Granby, nestled in the heart of Quebec’s Eastern Townships, offers renters a delightful blend of small-town charm and ample opportunities. Known for its beautiful parks, vibrant cultural scene, and family-friendly environment, Granby provides an exceptional quality of life. The city’s affordable housing market and strong sense of community make it an attractive option for those seeking a peaceful yet dynamic place to live. With its renowned zoo, bustling downtown, and numerous outdoor activities, Granby is a hidden gem that caters to a diverse range of lifestyles.
Fredericton, NB
Fredericton, the capital city of New Brunswick, offers renters a harmonious blend of historical charm and modern amenities. Known for its vibrant arts scene, beautiful riverfront, and welcoming community, Fredericton provides an excellent quality of life. The city boasts affordable housing options, scenic parks, and a strong educational presence with institutions like the University of New Brunswick. Its rich cultural heritage, coupled with a thriving local economy, makes Fredericton an attractive destination for those seeking a balanced and fulfilling lifestyle.
Saint John, NB
Saint John, New Brunswick’s largest city, is a coastal gem known for its stunning waterfront and rich heritage. Nestled on the Bay of Fundy, it offers renters an affordable cost of living with a unique blend of historic architecture and modern conveniences. The city’s vibrant uptown area is bustling with shops, restaurants, and cultural attractions, while its scenic parks and outdoor spaces provide ample opportunities for recreation. Saint John’s strong sense of community and economic growth make it an inviting place for those looking to enjoy both urban and natural beauty.
Saint-Hyacinthe, QC
Saint-Hyacinthe, located in the Montérégie region of Quebec, is a vibrant city known for its strong agricultural roots and innovative spirit. Often referred to as the “Agricultural Technopolis,” it is home to numerous research centers and educational institutions. Renters in Saint-Hyacinthe benefit from a high quality of life with access to excellent local amenities, including parks, cultural events, and a thriving local food scene. The city’s affordable housing and close-knit community atmosphere make it an attractive option for those seeking a balanced and enriching lifestyle.
Lévis, QC
Lévis, located on the southern shore of the St. Lawrence River across from Quebec City, offers a unique blend of historical charm and modern conveniences. Known for its picturesque views and well-preserved heritage sites, Lévis is a city where history meets contemporary living. Residents enjoy a high quality of life with excellent public services, green spaces, and cultural activities. The city’s affordable housing options and strong sense of community make it a desirable place for renters looking for both tranquility and easy access to urban amenities.
This category looked at factors such as average rent, housing costs, rental availability, and unemployment rates. Québec stood out with 10 cities ranking at the top, demonstrating strong economic stability and affordable housing options, which are critical for renters looking for cost-effective living conditions.
Québec again led the pack in this category, with five cities in the top 10. Ontario followed closely with three cities. British Columbia excelled in walkability, with four cities achieving the highest walk scores, while Caledon topped the list for its extensive green spaces. These factors contribute significantly to the overall quality of life, making these cities attractive for renters.
Victoria, BC, emerged as the leader in this category due to its rich array of restaurants, museums, and educational institutions, offering a vibrant community life. St. John’s, NL, and Vancouver, BC, also ranked highly. Québec City, QC, and Lévis, QC, scored the highest in life satisfaction, reflecting a strong sense of community and well-being. Additionally, Saskatoon, SK, and Oshawa, ON, were noted for having residents with lower stress levels.
For a comprehensive view of the rankings and detailed interactive visuals, you can visit the full study by Point2Homes.
While no city can provide a perfect living experience for every renter, the cities highlighted in this study come remarkably close by excelling in key areas such as housing affordability, quality of life, and community engagement. These findings offer valuable insights for renters seeking the best places to live in Canada in 2024.
