The real estate sector is one of the most watched sectors these days. As with the banking industry, it is also very sensitive to interest rates, and of course, construction companies and real estate management have experienced a completely different operating environment these days after the rapid hike in interest rates by the Fed.
However, not all real estate companies are created equal when it comes to the disruption caused by high interest rates. In fact, the home construction industry was one of the strongest sectors this year that was pushed to the background only by the strong performance of technology stocks. For example, the S&P Homebuilders Select Industry Index is up 31.7% year-to-date, marking nearly double the gains of the S&P 500, which is up 16% this year. In addition to this strong performance, hedge funds are also aware of the reality. As SEC hedge fund filings began pouring in for the second quarter of 2023, they also included a nice surprise for the homebuilding industry. That surprise came in the form of Warren Buffett’s Berkshire Hathaway’s $814 million acquisition of NVR, Inc. (NYSE:NVR), Lennar Corporation (NYSE:LEN), and DR Horton, Inc. (NYSE:DHI) – some of the largest homebuilders in America. The significant investment in Mr. Buffett’s stake came as companies were able to shrewdly navigate the high interest rate environment by taking advantage of the higher margins they secured for themselves during the surge in demand due to the coronavirus pandemic to offer buyers lower mortgage rates even as interest rates remained at levels. high for several years. . For more details about the construction industry, you should check out 15 of the largest construction companies in the world.
The boom and bustle of residential real estate has unfortunately not translated into other sectors. One of the worst performing real estate sectors this year is office real estate. These projects often require much higher investments than home construction projects, and require extensive financing and hundreds of millions of dollars in debt that must be repaid over decades. So any turmoil in the economy or business conditions spills over to office companies and real estate management funds (REITs), and that was the case this year as well. Office loans topped the 5% default rate in July, nearly tripling over last year’s figures. Office real estate companies are facing problems on multiple fronts. For starters, high interest rates and last year’s final interest rate uncertainty made it difficult to secure credit and loans for large projects. In addition, high rates make it difficult to pay off debts and, as if that were not enough, office staff do not return to work as quickly as expected, leaving many buildings vacant and owners seeing corresponding revenue declines.
In fact, there is a growing trend in the industry to see office companies find other uses for their buildings. For example, the Boston Planning and Development Agency runs a test program to see how good office buildings can serve as housing units. The incentive for office real estate companies to make this switch comes in the form of a lower tax rate, where apartment buildings will be taxed at $10.74 per $1,000 of assessed value compared to $24.68 per $1,000 as before. Then, for the next 29 days, real estate will be able to take advantage of a 75% tax rebate – so it seems like a pretty good deal for office real estate companies operating in downtown Boston. The bulk of the benefits under this scheme should apply to older Class B and C properties that have struggled to regain ground after the coronavirus shock. In addition, older buildings may be well suited for conversion to residential use, according to Susan Laney Charles, an architect and professor in the College of Architecture, Art and Planning at Cornell University (AAP).
The debt turmoil in office REITs was the focus of discussion during the Ashford Hospitality Trust, Inc. earnings call. (NYSE:AHT) where management participated:
During the quarter, we made significant progress on our loan extensions and made the strategic decision not to make the required payments on our A, B and F principal loan pools in order to meet our extended debt yield tests. This was a prudent economic decision that reflects the company’s comprehensive capital management process, which has explored and evaluated multiple options for these assets, including refinancing, extensions and asset sales. Importantly, the recent adjustment to our corporate financing provides us with additional flexibility with respect to these loan pools and by proactively choosing not to extend three of these pools, we will improve our balance sheet by reducing leverage and materially improve our future cash flows. Furthermore, the combination of the down payments and eventual elimination of debt associated with the groups that we did not extend, would reduce our debt by approximately $700 million, or more than 18%. We have committed to reduce the Company’s indebtedness over time, which is an important step towards our long-term goals of creating a more sustainable capital structure. In addition, capital recycling remains an important component of our strategy and we continue to look for opportunities to sell some non-core assets.
Today, we’ll take a look at some of the most undervalued hedge fund REIT stocks, notable among which are Public Storage (NYSE:PSA), Starwood Property Trust, Inc. (NYSE:STWD), and VICI Properties Inc. New York Stock Exchange: VICE).
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Our methodology
To compile our list of undervalued REITs to buy according to hedge funds, we first compiled a list of REIT stocks with a price-to-earnings ratio of less than 15. Then the number of hedge funds that had bought their stock as of June 2023 was determined by the Insider Monkey database of 910 hedge fund. Of these, the stocks with the largest number of hedge fund investors were chosen.
11 of the Most Undervalued REIT Stocks to Buy According to Hedge Funds
11. Apollo Commercial Real Estate Finance (NYSE:ARI)
Number of hedge fund investors in Q2 2023: 9
Most recent price-earnings ratio: 14.01
Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) is a real estate company engaged in trade finance. There was some good news in August, as analysts at JPMorgan upgraded their share price target to Neutral from Underweight.
Nine of the 910 hedge funds owned a stake in the company as of the end of the second quarter of 2023. Of those, the largest shareholder is Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is Michael Gelband’s ExodusPoint Capital since he owns $1.7 million in stock.
Together with Starwood Property Trust, Inc. (NYSE:STWD), Public Storage Company (NYSE:PSA), and VICI Properties Inc. (NYSE:VICI), Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is an undervalued real estate investment fund to buy according to hedge funds.
10. Whitestone REIT (NASDAQ:WSR)
Number of hedge fund investors in Q2 2023: 10
Latest price-earnings ratio: 12.4
Whitestone REIT (NASDAQ:WSR) is an American multistate retail real estate company. The company’s second-quarter earnings report saw revenue grow by $1.5 million, but funds from operations declined due to a higher interest rate environment.
During the second quarter of 2023, ten of the 910 hedge funds reported by Insider Monkey purchased a stake in Whitestone REIT (NASDAQ:WSR). Of these, the company’s largest shareholder is James Dondero’s Highland Capital Management, with $10.3 million worth of shares.
9. Arbor Realty Trust Company (NYSE:ABR)
Number of hedge fund investors in Q2 2023: 12
Most recent price-earnings ratio: 10.44
Arbor Realty Trust, Inc. (NYSE:ABR) equity financing for companies seeking real estate. Analysts at Raymond James increased their price target for the company’s stock to $17 from $16 in August 2023 and maintained the stock’s overweight rating.
By the end of the second quarter of this year, 12 of the 910 hedge funds that included Insider Monkey’s research had invested in the company. The largest shareholder of hedge funds is Arbor Realty Trust, Inc. (NYSE:ABR) is Israel Englander’s Millennium Management subsidiary thanks to its 2.6 million shares valued at $38 million.
8. RPT Realty (NYSE:RPT)
Number of hedge fund investors in Q2 2023: 14
Most recent price-earnings ratio: 12.69
RPT Realty (NYSE:RPT) is a retail real estate investment company that owns and operates shopping malls. Despite the turmoil in the broader industry, the company met or exceeded EPS estimates in all four quarters. The average share price target for RPT Realty (NYSE:RPT) is $11.06 and the stock is rated Buy on Average.
Insider Monkey searched 910 hedge fund investment portfolios in the June quarter of 2022 to find that 14 of them owned a stake in RPT Realty (NYSE:RPT). Of these, the largest investor is Ken Griffin’s Citadel Investment Group with a stake of $6.3 million.
7. Piedmont Office Realty Trust Company (NYSE:PDM)
Number of hedge fund investors in Q2 2023: 15
Most recent price-earnings ratio: 10.75
Piedmont Office Realty Trust, Inc. (NYSE:PDM) is a real estate investment firm with a multi-billion dollar real estate portfolio. Like its peers, the company is also having issues with its debt, with new debt seeing a rate of 9.25% which is nearly double the rate of its old loans that will expire soon.
As of the second quarter of this year, 15 out of 910 hedge funds surveyed by Insider Monkey have bought REIT shares. Noam Gottesman’s GLG Partners is the largest hedge fund shareholder in Piedmont Office Realty Trust, Inc. (NYSE:PDM) because he owns $16.9 million worth of stock.
6. Innovative Industrial Properties (NYSE: IIPR)
Number of hedge fund investors in Q2 2023: 16
Most recent price-earnings ratio: 13.84
Innovative Industrial Properties, Inc. (NYSE: IIPR) is an industrial real estate investment firm headquartered in Park City, Utah. The strong performance of the industrial REIT sector this year saw investment firm Federated Hermes Inc increase its share in REITs by a whopping 3,693% during the second quarter.
By the end of the June quarter of 2023, 16 of the 910 hedge funds in Insider Monkey research owned an interest in Innovative Industrial Properties, Inc. (NYSE:IIPR). Stuart J. Zimmer’s Zimmer Partners is the largest shareholder in the company, thanks to its investment of $90.3 million.
Public Storage (NYSE:PSA), Innovative Industrial Properties, Inc. (NYSE: IIPR), Starwood Property Trust, Inc. (NYSE:STWD), and VICI Properties Inc. (NYSE:VICI) are some of the undervalued real estate investment funds that hedge funds consider accumulating in.
Click to continue reading and see 5 Most undervalued REIT stocks to buy according to hedge funds.
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Disclosure: none. 11 of the Most Undervalued REIT Stocks to Buy According to Hedge Funds Originally posted on Insider Monkey.