In this piece, we will take a look at the 11 most undervalued REIT stocks to buy according to hedge funds. If you want to take a look at the top five stocks in this list and skip our introduction to the real estate industry then take a look at 5 Most Undervalued REIT Stocks To Buy According To Hedge Funds.
The real estate industry is one of the most watched sectors these days. Like the banking industry, it is also highly sensitive to interest rates, and naturally, construction and real estate management firms have seen a vastly different operating environment these days after the Federal Reserve's rapid interest rate hikes.
However, not all real estate firms are equal when it comes to disruption from the high interest rates. In fact, the home building industry has been one of the strongest sectors this year and one that has been pushed to the background only because of the strong performance of technology stocks. As an illustration, the S&P Homebuilders Select Industry Index has appreciated by 31.7% year to date, posting nearly twice the gains of the S&P500 index which has appreciated by 16% this year. Adding to this strong performance, hedge funds are cognizant of the reality as well. As the second quarter of 2023 hedge fund SEC filings started to flow in, they also included a nice surprise for the home building industry. This surprise came in the form of Warren Buffett's Berkshire Hathaway scooping up $814 million of shares in NVR, Inc. (NYSE:NVR), Lennar Corporation (NYSE:LEN), and D.R. Horton, Inc. (NYSE:DHI) - some of the largest home building companies in America. Mr. Buffett's big stake investment came as the firms smartly navigated the high rate environment by leveraging the high margins they had secured for themselves during the high demand of the coronavirus pandemic to offer buyers lower mortgage rates even as interest rates stand at multi year high levels. For more details about the construction industry, you should check out 15 Biggest Construction Companies in the World.
The booming and bustling of residential real estate has not unfortunately translated into other segments. One of the worst performing real estate segments this year is office real estate. These projects often require significantly higher investments than home building projects, and these require large scale financing and hundreds of millions of dollars in debt that has to be repaid for decades. So any turbulence in the economy or working conditions ripples through to office firms and real estate management trusts (REITs) and this has been the case this year as well. Office loans crossed a 5% delinquency rate in July, as it nearly tripled over the year ago figures. Office real estate companies are facing troubles on multiple fronts. For starters, the high interest rates, and the uncertainty surrounding a terminal rate that prevailed last year, made securing credit and loans for large projects difficult. To add to this, the high rates also make it difficult to repay debt, and as if this weren't enough, office workers are not returning to work as quickly as expected, leaving many buildings vacant and their owners seeing the corresponding revenue drops.
In fact, a growing trend in the industry is seeing office firms find other uses for their buildings. For instance, the Boston Planning and Development Agency is running a test program to see how well office buildings can serve as residential units. The incentive for the office real estate firms to make this switch comes in the form of a reduced tax rate, as the residential buildings will be taxed at $10.74 per $1,000 of assessed value as compared to the $24.68 per $1,000 as before. Then, for the next 29, the properties will be able to avail a 75% tax discount - so it looks to be quite a sweet deal for office real estate firms operating in downtown Boston. The bulk of the benefits under this program should apply to older Class B and Class C properties that have struggled to regain footing after the coronavirus shock. Additionally, the older buildings might actually be quite suitable for conversion to residential use, according to Suzanne Lanyi Charles, an architect and a professor at Cornell University's College of Architecture, Art, and Planning (AAP).
The turmoil in the debt of office real estate investment trusts was at the center of debate during the earnings call of Ashford Hospitality Trust, Inc. (NYSE:AHT) where management shared:
During the quarter, we made significant progress on our loan extensions and made the strategic decision not to make required pay downs on our keys A, B, and F loan pools in order to meet those extension debt yield tests. This was a prudent economic decision that reflected a comprehensive capital management process by the company, which explored and assessed multiple options for these assets, including refinancing, extensions, and asset sales. Importantly, the recent amendment to our corporate financing provides us with added flexibility regarding these loan pools and by proactively choosing not to extend three of those pools, we will improve our balance sheet by lowering leverage and it materially improves our future cash flows. Further, the combination of the pay downs and the ultimate removal of the debt associated with the pools that we did not extend, will lower our debt by approximately $700 million or more than 18%. We have been committed to deleveraging the company over time, and this is a significant step towards our long-term goals of creating a more sustainable capital structure. Additionally, capital recycling remains an important component of our strategy and we continue to pursue opportunities to sell certain non-core assets.
Today, we'll take a look at some undervalued REIT stocks being bought by hedge funds, with the notable picks being Public Storage (NYSE:PSA), Starwood Property Trust, Inc. (NYSE:STWD), and VICI Properties Inc. (NYSE:VICI).
11 Most Undervalued REIT Stocks To Buy According To Hedge Funds
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Our Methodology
To compile our list of the undervalued REIT stocks to buy according to hedge funds, we first made a list of REIT stocks with a price to trailing earnings ratio of less than 15. Then, the number of hedge funds that had bought their shares as of June 2023 was determined through Insider Monkey's database of 910 hedge funds. Out of these, the stocks with the most hedge fund investors were selected.
11 Most Undervalued REIT Stocks To Buy According To Hedge Funds
11. Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI)
Number of Hedge Fund Investors In Q2 2023: 9
Latest P/E Ratio: 14.01
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is a real estate firm that engages in commercial financing. It was in for some good news in August, as analysts at JPMorgan upgraded its share price target to Neutral from Underweight.
Nine out of the 910 hedge funds had held a stake in the firm as of Q2 2023 end. Out of these, the largest Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) stakeholder is Michael Gelband's ExodusPoint Capital since it owns $1.7 million worth of shares.
Along with Starwood Property Trust, Inc. (NYSE:STWD), Public Storage (NYSE:PSA), and VICI Properties Inc. (NYSE:VICI), Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is an undervalued REIT to buy according to hedge funds.
Whitestone REIT (NASDAQ:WSR) is an American firm that operates in several states and owns retail properties. The firm's second quarter earnings report saw it grow revenue by $1.5 million but funds from operations dropped due to the high interest rate environment.
During Q2 2023, ten out of the 910 hedge funds profiled by Insider Monkey had bought a stake in Whitestone REIT (NASDAQ:WSR). Out of these, the firm's largest shareholder is James Dondero's Highland Capital Management since it owns $10.3 million worth of shares.
Arbor Realty Trust, Inc. (NYSE:ABR) provides capital financing to firms seeking to acquire properties. Analysts at Raymond James increased the firm's share price target to $17 from $16 in August 2023 and kept an Overweight rating for the shares.
By the end of this year's second quarter, 12 out of the 910 hedge funds part of Insider Monkey's research had invested in the company. Arbor Realty Trust, Inc. (NYSE:ABR)'s biggest hedge fund stakeholder is Israel Englander's Millennium Management courtesy of its 2.6 million shares that are worth $38 million.
RPT Realty (NYSE:RPT) is a retail real estate investment trust that owns and operates shopping centers. Despite the turmoil in the broader industry, the firm has either met or beat analyst EPS estimates in all four of its quarters.RPT Realty (NYSE:RPT)'s average share price target is $11.06 and the stock is rated Buy on average.
Insider Monkey scoured through 910 hedge fund portfolios for their June quarter of 2022 investments to discover that 14 had held a stake in RPT Realty (NYSE:RPT). Out of these, the largest investor is Ken Griffin's Citadel Investment Group through a $6.3 million stake.
Piedmont Office Realty Trust, Inc. (NYSE:PDM) is an office REIT with a multi billion dollar property portfolio. Like its peers, the firm is also facing troubles with its debt, as fresh debt sees a rate of 9.25% which is nearly twice the rate of its older loans that will expire soon.
As of this year's second quarter, 15 out of the 910 hedge funds polled by Insider Monkey had bought the REIT's shares. Noam Gottesman's GLG Partners is Piedmont Office Realty Trust, Inc. (NYSE:PDM)'s biggest hedge fund shareholder since it owns $16.9 million worth of shares.
6. Innovative Industrial Properties, Inc. (NYSE:IIPR)
Number of Hedge Fund Investors In Q2 2023: 16
Latest P/E Ratio: 13.84
Innovative Industrial Properties, Inc. (NYSE:IIPR) is an industrial REIT headquartered in Park City, Utah. A strong performance of the industrial REIT segment this year saw the investment firm Federated Hermes Inc increase its stake in the REIT by a massive 3,693% during the second quarter.
By the end of 2023's June quarter, 16 out of the 910 hedge funds part of Insider Monkey's research had held a stake in Innovative Industrial Properties, Inc. (NYSE:IIPR). Stuart J. Zimmer's Zimmer Partners is the company's biggest stakeholder, courtesy of its $90.3 million investment.
Public Storage (NYSE:PSA), Innovative Industrial Properties, Inc. (NYSE:IIPR), Starwood Property Trust, Inc. (NYSE:STWD), and VICI Properties Inc. (NYSE:VICI) are some undervalued REITs that hedge funds are piling into.