2023-11-21 06:32:50 ET
Summary
- ABR and SLG have seen significant shorting activity in their common shares through 2023.
- These bearish positions might see upward pressure next year as the Fed pivots to a more dovish stance.
- Both tickers offer compelling and covered dividend yields that have moved to record highs on the back of year-to-date weakness in their common shares.
We're at the cusp of an inversion of stock market sentiment towards REITs with the Fed set to emerge victorious over a fight with inflation that's defined much of 2022 and 2023. This has seen interest rates rise to a 22-year high of 5.25% to 5.50% with REITs gyrating to the hawkish tune of the Fed. The trend year-to-date has seen widespread capital loss for investors across the REIT space with multiples being driven to record lows. Certain subsectors like mortgage REITs and office REITs have become near-toxic to investment portfolios with significant short bets that have almost all certainly paid off as we close out 2023. However, this zeitgeist of dread is set to invert once the market is cognizant that July 2023 was the final interest rate hike. The Fed is done.
The CME's 30-Day Fed Funds futures pricing data has placed the odds of any further rate hike at zero with the market now tilting towards an up to 100 basis point cut through 2024. To be clear, this time in roughly a year the Fed funds rate is likely to be around 4.25% to 4.50%, a slow reversion to the ZIRP mean that shaped and molded the pre-pandemic era. US inflation for October rose year-over-year by 3.2% , a sequential deceleration from comparative year-ago growth of 3.7% in September. This rate of growth is expected to further slow to 3.1% for November, with the Fed's target inflation rate of 2% back in view by the summer of 2024. Whilst this will depend on the absence of further supply-side shock from commodities against current geopolitical risks, we're at the cusp of a new paradigm. REITs and adjacent fixed securities that benefit from falling rates should be considered.
REIT Short Jim Chanos Retreats As Fed Pauses
Legendary Enron short seller Jim Chanos is shutting down his short-only hedge funds . These had a bias towards shorting office REITs, Tesla, and data centers. Critically, I think the shuttering reflects a quagmire facing shorts entering 2024. REITs have become oversold, unloved, and undervalued. This can only go on for so long as the broader macroeconomic factors that catalyzed their decline move in the opposite direction next year. I don't think there will be a monster rally for REITs in 2024, but a gradual and progressive upward pull in valuations that will be heightened for certain tickers where bears have crowded in the trade. This will be especially true if underlying operations performance for the tickers outperforms consensus in the absence of interest rate headwinds.
Arbor Realty ( ABR ) and SL Green Realty ( SLG ) form two potential considerations that could benefit from a potential retreat of bearish sentiment. SLG is the most shorted equity REIT in the stock market with a short interest that now stands at roughly 28%. Internally managed real estate lender ABR has a 26% short interest. These have seen their dividend yields move to highs on the back of common share weakness even as underlying operations remain resilient.
Arbor Realty ( ABR )
ABR is down roughly 11% year-to-date and currently offers a 13.8% annualized forward dividend yield as it last declared a quarterly cash dividend of $0.43 per share . The mREIT realized fiscal 2023 third quarter interest income which at $336.47 million came ahead of its year-ago comp by 30%. Net interest income of $107.29 million grew by 8% over its year-ago comp to drive a distributable EPS of $0.55 which covered the dividend by 128%.
Book value at the end of the third quarter was $12.71 per share, up 2% over the end of fiscal 2022 with the mREIT realizing positive book value growth even through the most disruptive period for lenders in a generation. ABR originates loans for single-family rental portfolios, multifamily properties, and a range of commercial real estate properties. The mREIT is now nearly a multifamily lender with 89% of its credit portfolio at the end of the third quarter concentrated on this sector.
SL Green Realty ( SLG )
SLG is New York's largest office landlord, down 14% year-to-date and currently trading hands for a 6.5x price to forward FFO multiple. The company last declared a monthly cash dividend of $0.2708 per share , for an annualized forward dividend yield of 9.5%. The equity REIT is currently trading for a 50% discount to book value per share of $59.28 at the end of the third quarter, or for 50 cents on the dollar.
The fear here is that continued working-from-home pressure will lead to a continued decline in leasing. Same-store occupancy which was 89.9% at the end of the third quarter, was up 10 basis points sequentially, with cash net operating income increasing by 10.4% year-over-year. SLG expects FFO per share for its full year 2023 to be in the range of $5.05 to $5.35 to provide at least 155% coverage against an annualized dividend of $3.25 per share. The dividend might still be reduced going into 2024 to address debt, but the FFO multiple is cheap and the discount to book is extreme. I currently own ABR as a long-term investment but I might consider SLG for a position after more clarity on its dividend for 2024.
For further details see:
Highly Shorted REITs To Consider On Fed Pivot And As Jim Chanos Unwinds Shorts