3 REITs That Could Triple In The Recovery

Jun. 04, 2020 8:25 AM ETHST, HT, HT.PR.C, HT.PR.D, HT.PR.E, MAC, MHIVF, SPG, SPG.PR.J, IVQ:CA, IVQ.U:CA155 Comments

Summary

REITs nearly tripled coming out of the 2008-2009 crisis.
Today, many REITs are even cheaper than back then.
We present 3 REITs that have the potential to triple in the coming years.
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Since the beginning of the recent bear market, we have been busy buying deeply discounted REITs at High Yield Landlord. As Warren Buffett would say:

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

We believe that there exists some generational buying opportunities in the REIT market right now and those who take the right actions will profit in the recovery.

We have already executed 12 phases of buying. Many of our recent additions have the potential to double or triple in value in the coming years as valuations normalize. I know that this sounds “too good to be true,” but the fact is that many of these REITs are now back at 2008-2009 levels, and we know how quickly REITs recovered back then.

It only took them 2 years to nearly triple:

Below we discuss three of our most opportunistic holdings that have the potential to triple in a recovery. Please note that these are also some of our riskiest holdings and we only own small positions as part of a well-diversified portfolio.

Macerich (MAC)

Mall REITs were beaten down already before the market crash - trading at large discounts to NAV and low cash flow multiples. Now after the crash, they are priced literally at cents on the dollar.

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Malls are hit especially hard by the recent crisis, and it puts MAC in a risky position because it is heavily leveraged. However, there are some good reasons to remain optimistic, especially at the current price.

MAC owns the best of the best malls in the nation. These are not just shopping destinations. They are highly urban mixed-use properties in exceptional locations. Prior to the crash, they were generating record-high sales per square foot and so clearly, they can co-exist with Amazon (AMZN):

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Obviously there will be significant near-term pain, but as long as they can survive the storm and live to see the recovery, MAC should be an enormous rewarding investment in the coming 5 years. Therefore, the key to the thesis is to have enough liquidity.

With over $735 million in cash (for a company valued at $1 billion), we believe that MAC has enough liquidity to weather the storm. That’s enough for a full year even with minimal rents coming in. We are also happy with the recent decision to reduce the dividend, which increases the chances of survival.

Insiders are also loading up on more shares, adding to the evidence that this liquidity should be more than enough:

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Risks are high, but trading at ~1/10 of its estimated NAV, it is a worthwhile investment. Heading into the 2008-2009 crisis, MAC sold off in a similar way, and everyone was calling for the end of malls. Yet, it only took 24 months for MAC to more than quadruple in value:

Chart

Today, MAC is actually even cheaper than back then, despite having a stronger balance sheets and owning superior assets. We are confident that they will survive and thrive again. If that is true, then the current valuation makes no sense even assuming several years of poor results.

Investors who want a lower risk alternative may want to consider Simon Property Group (NYSE:SPG), which is a similar investment but with a better balance sheet. We maintain a Strong Buy rating on both.

Hersha Hospitality (HT)

The hotel market is also taking a big hit and results are expected to be horrendous in 2020 and 2021. However, if you think longer term, there is great potential in certain Hotel REITs.

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Just one year ago, Hersha Hospitality (HT) traded at ~$20 per share and even then, it was relatively cheap at just around 10x pre-crisis FFO. Today, the shares trade at $5, a price that would only make sense if the company permanently destroys value through dilutive equity issuances or desperate property dispositions.

While that is a clear risk, we believe that the latest update from the company is very encouraging. Even in these times of uncertainty, HT was able to add another $100 million to its existing credit line, which is significant for a company valued at just around $180 million. It also obtained a waiver on financial covenants until March 31, 2021, providing important flexibility.

Finally, essential to the thesis is that this is a family business with insiders owning 11% of the equity. Despite having a lot of skin in the game, the executives continue to load up on more shares, week after week.

The share price is today even lower than in 2008-2009, another serious crisis that they survived. Priced at 20 cents on the dollar, HT could triple in the recovery and still be relatively inexpensive.

Hersha owns one of the best upper-scale urban hotel portfolios in the world and we are confident that people will soon travel again. In fact, most people are bored at home and now have plenty of time to plan their next trip. The big uncertainty is when will the economy opens up again and until then, HT will be a wild ride because of its leverage. The long term potential is so great that a small investment is warranted.

Investors who want to take less risk may want to consider Host Hotels (HST) which is a larger, better capitalized hotel REIT that is also discounted.

Invesque (OTC:MHIVF):

Finally, after malls and hotels, the third most impacted property sector is probably senior housing. The market is severely overbuilt and the recent crisis will delay future move ins.

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Invesque is one of the riskiest investments in this segment of the market because its balance sheet was not prepared for a crisis of this significance.

At a 60% LTV, it does not have much room of error. On the flip side, if it can merely survive, which we think it will, the company has enormous upside potential in the coming years as it reduces the leverage and returns to a more reasonable valuation. Right now, the company is priced at just 25 cents on the dollar, or put differently, a 75% discount to NAV. And unlike other deep value investments, this NAV has actually been verified by real-market transactions (In 2019, Invesque issued equity in a private placement for sellers of properties at $9.75 per share).

Can the company survive? It has three things working in its favor:

Resilient assets: It owns a modern, newly built, portfolio of senior housing, skilled nursing and medical offices with exceptionally long leases at 13 years. It has zero lease maturities in the coming 4 years, but 40% of its NOI comes from self-operated assets with more cash flow volatility. So far, the company has not suffered any significant impact from the crisis.
Limited maturities: Only 14% of the debt matures in the coming 3 years and banks have become more lenient since 2008-2009.
No need to pay a dividend: What is unique about Invesque is that it is not* officially structured as a REIT. It is a regular company and therefore, it is not forced to pay a dividend. While we understand that investors like to receive income, in this particular situation, this is a great advantage for Invesque as it is able to retain all its cash flow and organically build liquidity to face the crisis.

The main risk is if the virus starts to spread in its facilities, kills residents and delays move ins. It could negatively impact cash flow and quickly push the company in over-leveraged territory. We believe that the recent actions taken by the management to reduce cost and retain more cash flow will allow them to weather the storm even as its cash flow takes a hit in 2020.

Scott White, the CEO of the company, owns over 200,000 shares which used to be valued at several millions. I bet he is motivated to see that money grow again. The second largest shareholder, Magnetar Capital, is a famous hedge fund that specializes in alternative real asset investments. They own 25% of the equity.

While there is ~200-300% upside potential, we want to emphasize again that this is a high risk situation and we only recommend a small position as part of a diversified portfolio.

Bottom Line

These are three of the riskiest positions in our Core Portfolio and they represent only a tiny allocation. Most of our largest holdings are solid long term compounders that own defensive properties and have low leverage.

We invest a smaller portion of our Portfolio in such deep value REITs in an attempt to boost its long term upside potential.

Coming out of the great recession, these were the REITs that enjoyed the most upside as they were left for dead. Many retail and hospitality REITs tripled or quadrupled within just a few quarters.

Today, valuations are even lower than 2008-2009 in many cases. By selectively investing in deep value REITs, we expect to our portfolio value to balloon to new all time highs when the initial panic is over.

In the meantime, we will keep on accumulating at these prices as long as we can.

The High Yield Landlord Core Portfolio:

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Summary

Macerich (MAC)

Hersha Hospitality (HT)

Invesque (OTC:MHIVF):

Bottom Line

The High Yield Landlord Core Portfolio:

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