2023-08-15 08:05:00 ET
Summary
- REITs are currently undervalued.
- And insiders are buying millions worth of shares.
- I highlight three REITs with significant insider purchases.
I have written quite a few articles explaining why I am buying REITs ( VNQ ) at the moment.
In short, they are now priced at some of their lowest valuations in years with many individual REITs trading at huge discounts to their net asset values, allowing investors to buy real estate at 60-70 cents on the dollar...
REITs are discounted. Note that this chart dates from late 2022 but prices have dropped even lower since then. (Janus & Henderson)
They are so cheap because the market has overreacted to rising interest rates, not understanding that REIT balance sheets are the strongest they have ever been with low debt and long debt maturities. Besides, interest rates only rose because of the high inflation, which has also resulted in rapidly growing rents and rising dividend payments in most cases:
NAREIT
And this is not just my opinion.
The best proof that REITs are now undervalued is the fact that many REIT insiders are now purchasing shares of their own companies.
These insider purchases are a strong validation because these people know best what's the fair value of their properties. They are typically already heavily invested in their company and yet, they keep buying more.
Here are three REITs with large recent insider purchases to consider:
Agree Realty ( ADC )
Earlier this month, ADC had over $4 million worth of insider purchases.
That's very significant!
Openinsider
And I am not surprised.
ADC is one of the highest quality net lease REITs in the world, owning mostly Class A properties occupied by high-quality tenants such as Walmart ( WMT ) grocery stores and Walgreens ( WBA ) pharmacies.
These properties generate steady and predictable cash flow that's set to rise even if we go into a recession. But despite that, the company's share price has dropped to a historically low valuation:
Did something break?
Absolutely not.
Rents keep rising steadily and they continue to acquire new properties. In fact, they recently bumped up their full-year acquisition guidance because they are currently earning nice spreads over their cost of capital. They are getting near 7% cap rates as most buyer competition has left the market, but their cost of capital is just 5.5%.
Agree Realty
Finally, its balance sheet is one of the strongest in its peer group with a low LTV and practically no debt maturities before 2028:
Agree Realty
Historically, ADC has been able to deliver 10%+ annual total returns to its shareholders by paying a ~4% dividend yield and growing by ~6% annually. We expect that to continue over the long run, but then on top of that, ADC now also offers about 25% upside potential to its 5-year average AFFO multiple and insiders are buying the dip.
We own a position in our Retirement Portfolio and view these insider purchases also as a positive sign for its peers Realty Income ( O ), National Retail Properties ( NNN ), and Essential Properties Realty Trust ( EPRT ).
Safehold ( SAFE )
Safehold is the king of bets on lower interest rates. It specializes in ground leases, which are an extreme version of net leases with even greater durations and therefore, they are even more sensitive to interest rates. In case you are not familiar with ground leases, I recommend that you first watch this video:
The surge in interest rates has caused its share price to crash over the past year, but its CEO has not lost confidence in the company. He just recently bought $1.4 million worth of shares in the open market and there were another half a million worth of insider purchases shortly before that:
Openinsider
Just like the CEO, we think that this is an opportunity and we are also buying more shares.
The value of ground leases is very sensitive to interest rates, but their cash flows are very safe. Leases are 99 years long and tenants would do anything to avoid a default because it would lead to them losing the ownership of their building. In most cases, a lease default would actually benefit SAFE as it would get a building free of charge, and the margin of safety is massive since the land typically only accounts for about 1/3 of the total value.
Safehold
The debt maturities are also very long and so the high interest rates are not an immediate threat to the company. Unless you think that today's high interest rates will remain for a long time to come, then it is hard to explain why the share price has been cut down to just 1/4 of its previous peak.
If like us, you think that interest rates will return to lower levels as we get the inflation back under control, then now is a great time to buy shares of SAFE.
It collapsed as interest rates went higher, but we expect the exact opposite to happen as interest rates return lower.
The share price of the company could double and it would still trade at just half of its previous peak. You also earn a near 4% dividend yield while you wait.
Uniti Group ( UNIT )
The CEO of UNIT recently bought nearly $1 million worth of shares:
Openinsider
That's a pretty strong vote of confidence coming from what's one of the cheapest REITs in today's market.
It is currently priced at just 4x FFO and just 1/3 of our estimate of its net asset value. In late 2021, it was actually rumored that it could be bought out for $15 per share, but it is now priced at just around $5:
Seeking Alpha
Why is it so cheap then?
The infrastructure REIT owns a very desirable portfolio of fiber networks, but it is dealing with two issues: it has too much debt and it has a problem tenant that's arguing that it should get a large rent cut when its lease expires.
The good news is that the company recently refinanced its major debt maturities until 2026 and the lease with its biggest tenant won't expire before 2030.
Therefore, if you think that interest rates will head lower in the coming years, then this REIT could be one of the best opportunities in today's market. It is so cheap because the market fears that the REIT won't be able to handle today's high interest rates, but if rates return lower, then it would materially reduce risks and justify a much higher valuation.
And the management is not just waiting.
They think that M&A is the best path to unlock value and they are today seeking a strategy transaction to lower their debt. A lot of capital has been raised in infrastructure funds in recent years and private markets give these assets a lot higher valuations so why not just sell some stuff or even all of it?
I would typically not give much value to such talks, but the CEO recently bought about a million dollars worth of shares, which is a pretty strong vote of confidence, especially at these valuations.
The dividend yield is also about 10% at today's valuation. Even if it was cut in half to prioritize deleveraging, the yield would still remain significant.
Bottom Line
There are lots of insider purchases in the REIT sector right now.
That's not surprising given that many of them are today priced at a steep discount relative to the fair value of their assets.
We are also buying the dips at High Yield Landlord.
For further details see:
Insider Buys: 3 REITs With $1+ Million Investments