REITs (VNQ) soared in late 2023 upon the Fed’s announcement of at least 3 interest rate cuts in 2024.
However, since then, REITs have experienced a significant dip, with some plunging to lower levels:
This presents a compelling opportunity as the expectations for lower interest rates remain unchanged, with a 99.6% chance of at least one rate cut by June according to the FedWatch tool:
The dip in REITs is not a reflection of a change in outlook, but rather shortsighted profit-taking by investors, oblivious to the fact that REITs remain heavily discounted even after the recent rally.
Currently down 26% over the past two years, despite a 5-10% increase in cash flows, many individual REITs have experienced even steeper declines:
The extensive decline is linked to investors finding solace in money market funds, yielding over 5%. Nevertheless, as interest rates are slashed, a significant influx of capital into REITs and other high-yielding equities is anticipated.
In light of this, it is prime time to amass more REITs, especially following the recent dip. Below are two “Buy The Dip” prospects:
Farmland Partners (FPI)
After a brief recovery to $13 per share, Farmland Partners has regressed to the low $11 range:
Priced at approximately $11 per share, FPI represents a compelling buy, with its net asset value estimated to hover around $18.
This signifies a ~40% discount to its net asset value. The unexpected drop in price is attributable to its descent alongside the REIT sector, despite farmland’s escalating worth.
Interestingly, the management is capitalizing on this disparity between public and private markets by selectively vendoring properties at premiums to their book value, and repurchasing shares at substantial discounts to their fair value.
In the past year alone, they revealed sales worth $120 million with an average 15% gain, utilizing the proceeds to buy back shares and pay off debt—remarkable for a company with a $550 million market cap.
Additionally, the chairman and former CEO of the REIT invested another million in stock with personal funds, despite already being heavily invested:
Their optimism stems from the opportunity to acquire farmland equity at 60 cents on the dollar.
Farmland has consistently been a superior investment over time, garnering even higher returns than the S&P 500 (SPY). Procured at a considerable discount, it becomes an even more lucrative investment.
As interest rates revert to lower levels, a resurgence of confidence in REITs should be particularly beneficial to lower-yielding REITs like FPI, potentially yielding a 30-50% upswing in a future recovery. Should the share price not rebound, the company will persist selling assets to repurchase shares, and ultimately might decide to sell the entire company to unlock its value
Camden Property Trust (CPT)
Camden realizes the plight of REITs as it finds itself in a similar predicament to Farmland Partners, with a potential upside as its share price converges with its net asset value. An opportune moment has presented itself to investors as these REITs offer compelling bargains.
