CA - Real Estate At 50 Cents On The Dollar

2023-06-13 07:30:00 ET

Summary

• Real estate is today heavily discounted in the public market.
• REITs are priced at cents on the dollar.
• I like a big discount and I am buying these names.

Yes, you read the title right.

It may sound too good to be true, but it is today possible to buy real estate at just 50 cents on the dollar.

And that’s not all.

You will get the added benefits of liquidity, diversification, professional management, and limited liability on top of it, free of charge.

How can you get in?

It is actually quite simple.

All you have to do is buy shares of undervalued publicly listed REITs ( VNQ ). They are today priced at some of the steepest discounts to their net asset value ever with some companies trading as low as 30 cents on the dollar.

To give you an example: Vonovia (VNA / VONOY ), which is the biggest landlord in Germany and commonly perceived to be a blue-chip company, is today trading at €16 per share, but its net asset value per share is €54.

This essentially means that you get to buy an interest in its portfolio at just 30 cents on the dollar, or put differently, a 70% discount to fair value.

What’s the catch?

There isn’t one.

Sure there are risks, but that's true for all investments and this is already reflected in the private market pricing of the real estate, which represents the net asset value. In the case of Vonovia, its rents are actually growing, it has a strong BBB+ rated balance sheet, and its management has a great track record.

If you were offered to buy high-quality real estate at such a large discount to fair value in the private market, you would probably jump on the opportunity, but just because REITs are publicly listed, investors are reluctant to buy them and will often act irrationally in the face of uncertainty.

To get back to Vonovia, it has historically traded at a 5% premium to its net asset value on average throughout its history. This makes sense given that you get to invest in real estate with the added benefits of liquidity, diversification, and professional management.

But today, it is priced at a massive discount because its share price has collapsed even as its property values remained more or less stable.

Here are some other examples:

BSR REIT ( BSRTF ) is an apartment REIT that owns a portfolio of affordable apartment communities in Texas and it is priced at a 40% discount to its net asset value. That’s despite being invested in some of the best markets in the nation like Austin and Dallas and enjoying rapid rent growth.

Another good example would be Farmland Partners ( FPI ) which is the largest farmland REIT by acreage. It owns land that it rents to farmers, and it is currently hiking its rents by 15% as leases expire. Despite that, it is currently priced at an estimated 25% discount to its net asset value.

Getting back to a more extreme example, Macerich ( MAC ) owns Class A malls in some of the best markets in the nation, its sales per square foot keep hitting new all-time highs, but its shares are priced at an estimated 60% discount to net asset value.

So why aren’t investors jumping on these opportunities?

Well, it is a tough question because I am jumping on the opportunity.

My best guess is that investors probably fear that real estate will lose significant value, causing these REITs to underperform as well.

Of course, this is a risk and I don't deny that real estate may deflate a bit as a result of rising interest rates. But I think that you are getting these REITs at such massive discounts to their fair value that you should still come out ahead and earn large returns in the coming years as valuations recover.

Good real estate has always appreciated in value in the long run.

Rents are today still growing at a good pace.

REIT balance sheets are some of the strongest ever with low debt and long maturities.

And while interest rates are high, it is unlikely that they will stay at these high levels forever. As inflation continues to cool down and we eventually go into a recession, interest rates will likely be cut again. That's what the debt market is already pricing...

So the catch here is that you need to have a long time horizon.

You cannot predict how REITs will perform in the next quarter or even year. But if you have the patience to wait it out and let the uncertainty pass, I think that it is very likely that their valuations will eventually recover and richly reward those investors who invest today while they are discounted

The last time REITs were so cheap, it was early into the pandemic, and they then more than doubled investors' money in the following two years:

I made a lot of money in the recovery in 2020 and 2021, and I expect to again profit in the coming years as REITs recover.

You don’t often get the chance to buy good real estate that’s liquid and professionally managed at 50 cents on the dollar, so don’t miss out on it!

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