UMH - Billionaire Investor Says 'Buy REITs' - Part 2

Summary

• Blackstone is buying REITs left and right.
• We expect the REIT M&A boom to continue.
• We present some likely buyout targets.

In a recent article , we explain that we expect the REIT M&A boom to continue in the second half of the year and going into 2023.

This year alone, Blackstone ( BX ) has already agreed to buy four different REITs for nearly $30 billion!

• American Campus Communities ( ACC ) for $12.8 billion (which profited members of High Yield Landlord)
• PS Business Parks (PSB) for $7.6 billion (which also profited our members)
• Preferred Apartment Communities ( APTS ) for $5.8 billion
• Resource REIT for $3.7 billion

And in the last quarter alone, Blackstone raised another $49 billion for its real estate strategies!

Will they use this capital to buy more REITs?

We strongly believe so.

Following the recent dip, REITs are today a lot cheaper than private real estate, and Blackstone's executives have taken notice of the opportunity.

Blackstone's CEO and self-made billionaire Steve Schwarzman made this clear in their recent earnings call :

For the first six months of the year, our real estate strategies appreciated 9% to 10% versus a 20% decline in the REIT index , equaling an outperformance of roughly 3,000 basis points. I don't know many asset classes that perform -- outperform indexes by 3,000 basis points. [added emphasis]

Blackstone's CEO and, also, self-made billionaire John Gray added that they are looking for buyout opportunities in the REIT market:

The best opportunities today are clearly in the public markets on the screen and that's where we're spending a lot of time.

If Blackstone can buy a REIT at a 20% discount to fair value, why would it buy private real estate at a higher price?

Besides, buying REITs also allows them to efficiently allocate large sums of money with pre-existing management already in place.

So we can expect many more buyouts in the near term.

Blackstone will be engaging in M&A, but so will also other large private equity groups who follow Blackstone's moves. Brookfield ( BAM ), KKR ( KKR ), etc. have all taken REITs private over the past years and will continue to do so as opportunities come along.

What REITs are the most probable targets?

That's the focus of today's follow-up article.

In part 1 , we reviewed why Blackstone is going after so many REITs in today's environment.

In part 2, we will today discuss which REITs could be the next target.

We think that the most probable targets are likely to have some of the following characteristics:

• Small-to-Mid-Cap Size: The REIT needs to be large enough for it to move the needle, but not too large to create concentration risk for the purchaser. Somewhere between $500 million to $5 billion worth of assets is probably a good range.

• Desirable property sector: Some property types are much more popular than others. The more popular it is, the more likely it is to attract interest from a large number of potential buyers. In today's market, multifamily properties are particularly popular because they are resilient to inflation, rising interest rates and even recessions.

• Older management with a lot of skin in the game: If the management owns a lot of shares and is approaching retirement, they may be more willing to consider a buyout offer at the right price.

• Large discount to NAV: Private equity players target REITs in order to get a discount relative to what they would need to pay in the private market. A large discount to NAV will make them more likely to target a REIT.

At High Yield Landlord, we have cherry-picked a portfolio of REITs that share some of these characteristics as we aim to profit from the arbitrage between private and public market valuations.

Currently, our Core Portfolio holds 24 REITs, and in what follows, we will take a look at two examples that are probable buyout targets for Blackstone and others:

UMH Properties

UMH Properties ( UMH ) is one of just three manufacturers housing REITs. The two others are Sun Communities ( SUI ) and Equity Lifestyle ( ELS ).

We think that UMH is a likely buyout target because:

• Small-to-Mid-Cap Size: With its $1 billion market cap, UMH is big enough to move the needle, but not too big for most private equity players.

• Desirable property sector: Manufactured housing communities are highly desirable property investments, but they are very limited in supply. Few ever come for sale, and there are typically a lot of interested buyers. They are so popular because they generate highly resilient cash flow (affordable housing), have little capex (tenants only rent the lots), and enjoy attractive growth prospects (landlords are in a position of strength to hike rents).

• Older management with a lot of skin in the game: UMH was founded by the Landy family. Today, they remain some of the biggest shareholders, and they are growing older in age. Recently, they sold their other REIT called MNR Real Estate to the highest bidder and it attracted the interest of many private equity players, including Starwood ( STWD ). This may be a sign that they are looking to cash out and would be willing to also consider an offer for UMH. It likely put UMH on the radar of the private equity groups who witnessed the sale of MNR.

• Large discount to NAV: Earlier this year, UMH traded at right around its NAV, but since then, it has dropped by 33%. As a result, it is now priced at an estimated 30% discount to NAV. Even if the buyer paid a reasonable premium, they would still get the assets and the platform at an attractive valuation. And once again, these are the type of assets that you cannot easily buy in the private market.

Best of all, if there is no deal, that's not a problem. UMH is likely to do great for its shareholders in the long run anyway.

It is steeply discounted, enjoys rapid growth prospects, and pays a generous 4.4% dividend yield while you wait. We expect double-digit annual returns from the yield and growth alone, and an additional 40% upside from multiple expansion.

Clipper Realty

Clipper Realty ( CLPR ) is an apartment REIT. But unlike its larger peers like Equity Residential ( EQR ) or AvalonBay ( AVB ), CLPR focuses only on New York City.

We think that CLPR is a likely buyout target because:

• Small-to-Mid-Cap Size: Its market cap is just $357 million, which may seem too small at first, but that's because its equity is deeply undervalued, and the company also has debt on its balance sheet. Its total assets are worth well over $1 billion.

• Older management with a lot of skin in the game: The management is the biggest shareholder of the company, owning over 40% of its equity. But the company has persistently traded at a steep discount to NAV for most of its history, and it is likely frustrating them, especially as they approach retirement. The founder, CEO, and co-Chairman, David Birtricher, was born in 1949 and likely won't do this for another decade. Selling out to a big private equity player seems like the best path for them to unlock value.

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