Lately, I took a peek at the most up-to-date 13F filings of major private equity groups like Blackstone (BX), Starwood, Kohlberg Kravis (KKR), and Brookfield (BAM) to gauge their recent investment activities.
All three entities have been enthusiastic about the opportunities in the REIT sector (VNQ).
Barry Sternlicht, the CEO of Starwood, expressed his confidence in the sector during a recent CNBC interview:
“By the way, when credit comes back, you are gonna see REITs take off… There are some unbelievable bargains in REITs. We did the same thing during the pandemic. We bought a dozen stocks all over the world and we had a 70% IRR on that stuff. We are already buying some stuff in the public market…”
– Barry Sternlicht, CEO/Chairman, Starwood Q3 2023 CNBC Interview
It is more than just talk at this point. Starwood recently disclosed an investment into Camden Property Trust (CPT) in its latest 13F filing. It is now its single largest position, representing 81% of its securities portfolio.
Moreover, Blackstone also revealed another REIT investment in its latest 13F filing. Its biggest recent portfolio addition is Mid-America Apartment (MAA). Note that MAA has also had nearly $1 million worth of insider purchases in recent months.
This is strong evidence that apartment REITs are now mispriced. These private equity players own properties worth billions and are investing in these REITs because they trade at large discounts relative to the fair value of their assets. They are today priced at a 6-7% implied cap rate, but their properties are really worth closer to a 4.5-5% cap in the private market. That’s a large spread. Earlier this year, Camden Property Trust sold one of its older properties in LA metro at a 4.25% cap rate or $440k per unit. Moreover, UDR (UDR) also recently announced that it was going to acquire a portfolio of apartment communities in Dallas and Austin at a 4.5% or $230k per unit. Both of these transactions offer additional evidence of how heavily discounted apartment REITs have become relative to private market values.
This UDR transaction is especially interesting for BSR REIT (OTCPK:BSRTF / HOM.U) because its portfolio is quite similar, but it is today offered at a 6.5% implied cap rate and $165k per unit. Their assets are located in the same markets, and comparable in age, in rent, and in occupancy to UDR’s recent acquisition.
|UDR’s acquisition in Texas
|BSR REIT public market valuation
|Implied Cap rate
|Price per unit
I would add that BSR’s current rents are estimated to be nearly 10% below market, and therefore, its forward normalized implied cap rate is about 7%, which is quite exceptional for apartment communities in rapidly growing Texan markets.
BSR estimates that its current net asset value per share is $18.50 and that’s based on a near-5% cap rate (applied to its current NOI), which seems quite conservative based on these recent transactions. But its current share price is just $10 per share, meaning that it is currently priced at a 40% discount to its net asset value. The management is taking advantage of this dislocation by buying back shares and made the following comment on a recent earnings call:
“As long as our units trade at a significant discount to NAV, we see buybacks as an attractive option. We will continue to capitalize on opportunities to repurchase REIT units to drive stronger financial returns.”
Moreover, insiders also own a large chunk of the equity themselves and they have made several additional insider purchases over the past year. We followed in their footsteps and those of Blackstone/Starwood and also topped up our position. The share price is currently at a 52-week low even as most other REITs have recovered a bit in recent weeks. We continue to think that as interest rates return to lower levels and/or BSR gets bought out, it could enjoy 50%+ upside from here, and while we wait, we earn a 4% dividend yield and the management keeps buying back shares to create value for shareholders.
In addition to BSR, we also recently bought more shares of Camden Property Trust. CPT is similar to BSR in that it focuses on Class B affordable communities in strong sunbelt markets, but CPT is the safer option of the two. It is a lot larger in size, better diversified across markets, has a longer track record, is able to develop its own assets, and has an even stronger balance sheet. It does not have quite as much upside potential, but its risk-to-reward is equally attractive given that it is safer and still trades at a >30% discount to its net asset value. This is a blue-chip REIT that rarely comes for sale and today it is cheap enough to attract the attention of the likes of Starwood. We expect 30% upside potential, and while we wait, we will earn a 4.5% dividend yield and we expect the company to keep growing its FFO per share by ~5% annually over the long run. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.