Buy The Dip: 3 REITs Getting Way Too Cheap

Dec. 07, 2021 8:25 AM ETEPR, CLPR, KLPEF, SPG, SLG26 Comments12 Likes

Summary

  • A number of REITs recently dropped by 10%+, despite being already discounted prior to the dip.
  • As a result, they now offer exceptional value relative to most other stocks, and now is a good time to accumulate them.
  • We highlight three of our top picks to buy the dip.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Learn More »

Miniature wooden houses and red arrow up. The concept of increasing the cost of housing. High demand for real estate. The growth of rent and mortgage rates. Sale of apartments. Population grows

Andrii Yalanskyi/iStock via Getty Images

All we hear about is the Omicron variant right now.

It is causing great uncertainty and stocks are selling off because of it.

But before you rush to "buy the dip", you should put this dip into historical perspective.

Right now, the broader market as represented by the S&P 500 (SPY) is down only 3%; and Tech stocks (QQQ) are only down slightly more than that:

SPY and QQQ chart
Data by YCharts

My point here is that while the recent volatility may have seemed intense, it really wasn't anything extraordinary. In the past 50 years, the S&P 500 has experienced 10%+ corrections in 29 of them or every 19 months on average.

This means that the market is due for a correction of some sort right now, at least based on history. Of course, we cannot predict how the market will perform in the short run, but given all the uncertainty that's out there right now, I personally wouldn't run to buy the broader market indexes after such a little dip.

However...

The market is made of many sub-sectors, some of which dropped a lot more over the past few days. Most notably, a number of REITs recently dropped by 10%+, despite being already discounted prior to the dip, and as a result, they now offer exceptional value relative to most other stocks.

If like me, you think that the recent Omicron fears will likely turn out to be just another temporary setback, like the Delta variant fears, then now is a good time to accumulate more shares of these discounted REITs.

That's what we are doing at High Yield Landlord at the moment. We are buying the dip in the REIT sector (VNQ) because that's where we have continuously found the best opportunities since the beginning of the pandemic, and the results speak for themselves:

VNQ chart

We think that this recent dip is just another opportunity to amass larger REIT positions that will result in substantial gains once the pandemic is forgotten in a few years from now. Below we highlight 3 REITs that are getting way too cheap following the recent dip:

EPR Properties (EPR):

EPR owns a lot of movie theaters and other experiential properties. As a result, it suffered tremendously in 2020 when its properties were forced to shut down and tenants stopped paying their rent.

EPR Properties photo

source

However, since then, it has nicely recovered with rent collection rates returning to near-normal levels, which allowed it to reinstate a dividend and even get back to new acquisitions.

Despite that, its share price has failed to recover, and the market now fears that the Omicron variant could put EPR right back to where it was in 2020. As a result, it dropped heavily in the recent days:

EPR Properties price
Data by YCharts

We believe that this is an opportunity because we view lockdowns/mandated property closures as exceedingly unlikely based on the information that we currently have, and if EPR could survive till now, it will get through this as well.

Right now, it is priced at just 60% of where it was in late 2019, offering a steep discount to investors who can ignore the near-term noise and focus on the long-term prospects of the company, which are mostly unchanged despite the 2-year setback. The experience economy will keep on growing, high-quality movie theaters are not going away, and since EPR is a triple net lease landlord, it earns steady rent checks from 14+ year leases and you don't need to be very bullish on its underlying tenants for EPR to succeed... which it has done ever since it went public 20+ years ago:

Long-term historical outperformance

Priced at just $45 per share, it also offers a near-7% dividend yield, which is truly exceptional for an investment-grade rated high-quality REIT in a world of 0% interest rates. EPR is not without its risks, but the risk-to-reward is very compelling for patient, long-term-oriented investors a the current price.

Clipper Realty (CLPR):

CLPR is an apartment REIT that owns mostly properties in Manhattan and Brooklyn:

Clipper Realty photo

source

It was the most discounted apartment REIT before the recent sell-off and following it, it is even more discounted because it dropped the most in its peer group. Recently, it was approaching $10 per share, and now it is offered at just $8.50, or 15% cheaper:

Clipper Realty price
Data by YCharts

It dropped so much because it is mostly invested in New York, which made headlines as it declared a state emergency ahead of a potential Omicron spike.

We think that this sell-off will be short-lived because the fundamentals of NYC are now already recovering, its population is growing, and rents are back on the rise.

Moreover, SL Green (SLG), another NYC-focused REIT, just recently announced a dividend hike and a special dividend, which reflect positively on all NYC-heavy REITs, including CLPR.

Currently, it is the last remaining apartment REIT that's priced at a 30%+ discount to pre-Covid levels and offers a near 5% yield. This is extraordinarily cheap because multifamily cap rates have compressed during the pandemic, and therefore, CLPR's properties are today more valuable than ever. Its NAV per share is estimated to be $15+ and you can buy shares at just $8.5.

Klepierre (OTCPK:KLPEF):

We have often described Klepierre as the European version of Simon Property Group (SPG) because both companies share similar characteristics (focus on Class A malls, strong balance sheets, superior management, etc.) and SPG even owns 20%+ of Klepierre's equity.

But surprisingly, KLPEF has performed a lot worse than SPG in the recent past and, as a result, it currently trades at a steep discount to pre-Covid levels, whereas SPG has already fully recovered:

Klepierre chart
Data by YCharts

This is likely because many European countries have reinstated stricter Covid restrictions and the Omicron variant has also been discovered in larger quantities in Europe. Surely that doesn't help Klepierre in the near term, but if you can look past the near-term uncertainty, this is a great opportunity because we have already witnessed SPG's recovery in the US and the same recovery is very likely to occur for Klepierre once restrictions are lifted.

Following the recent 10% drop, Klepierre is now priced at a 35% discount to pre-Covid levels which is quite exceptional if you think that this is only a temporary crisis for its properties.

At the current share price, Klepierre trades at 7x pre-Covid cash flow, and assuming it reinstates a dividend that's 30% below its pre-Covid rate, it will also yield ~8%. As we move past this crisis, we expect 50%+ upside, and we wouldn't be surprised if SPG decided to buy out Klepierre if it keeps trading at these discounted levels. It would be immediately accretive, accelerate SPG's international expansion plans, and improve the average quality of its portfolio.

Bottom Line

Real estate is an incredibly resilient asset class because it is limited, necessary, and flexible - giving it remarkable durability in value. But because most REIT investors are excessively short-term oriented, many REITs will often trade at steep discounts to fair value when there is near-term uncertainty. EPR, CLPR, and KLPEF are all great examples of that.

If you are long-term oriented, these are fantastic opportunities because you get to buy high-quality real estate at pennies on the dollar. You also get the management, diversification, and liquidity for free on top of that.

In my mind, nothing provides better risk-to-reward in today's market and that's why I continue to allocate 50%+ of my net worth in these opportunities.

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This article was written by

Jussi Askola profile picture
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Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.


DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

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Disclosure: I/we have a beneficial long position in the shares of EPR; CLPR: KLPEF; SPG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Relevant disclosure to presented performance: past performance is no indication of future results. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated, includes international REITs, and may at times invest in companies that are not typically included in REIT indexes. The performance of our portfolio is underrepresented because it is affected by withholding taxes on all dividends. This is not the only account that I own, but it is the first account that I created for the sole purpose of building track record and it is now over 5 years old, which is probably just enough to assess results. The performance is money-weighted.

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