It’s hard to describe the performance of Real Estate Investment Trusts (REITs) since the onset of the COVID-19 pandemic last winter: Even dogs, bears, dumpster fires, losers, laggards — and maybe even Energy stocks — would take offense at and object to being lumped together with REITs. There’s something to be said for the Warren Buffett line about buying when others are fearful. On the other hand, trying to catch falling knives can really hurt. Ultimately, though, being a Libra (we love reconciling opposites) I see how trend following and contrarianism can be strategically combined, and could be an interesting way to speculate in roughed-up Real Estate Investment Trusts.
A Quick Picture
Here’s a price chart for Vanguard Real Estate ETF (NYSE:VNQ), a generic own-them-all fund that is seen by many as a benchmark for the REIT group.
Even with the bounce off the March 2020 low, VNQ remains more than 20% below pre-pandemic levels. And the weakness is based on fundamentals that are real and painful — difficulties being experienced by property owners in collecting rent from tenants whose businesses have been closed or reduced by the pandemic. Dividends for this traditional income-investor favorite sector have been reduced or eliminated and we’re not by any means out of the woods.
There are sub-sectors within the REIT group, and some are better than others (see, e.g., distribution centers, data centers), some are muddling along (residential REITs), some that are hurting (offices, hotels), and others may never come back (see, e.g., big shopping malls, which, even before the pandemic, were already being weakened by e-commerce and office properties, where the influence of work-from-home is likely to outlast covid).
So What, If Anything, Makes A Case For Buying/Holding REITs?
One obvious answer, and one often given by REIT commentators, is cyclical in nature. Nothing lasts forever. Various kinds of real estate remain as important as ever and cycle transition: There’s a reason why we use the phrase business “cycle” instead of business perpetual. This covers a lot of ground and a lot of property types, has been well covered elsewhere and is not the topic I’m addressing today.
I’m interested now in the other kind of potential upturn, the kind that’s referred to as secular change, special situation, transformation, etc. This is not necessarily related to what a REIT is today but instead, with what it might become in the future. It’s not about REIT’s as operating businesses (i.e., landlords of specific types of properties). It’s about the asset class itself; real estate, land, the thing that sparked countless wars, revolutions, etc. over the millennia.
Food For Thought
As I was browsing the other day through The Real Deal (a major and perhaps the premier real-estate trade publication), an intriguing article caught my eye: Abandoned Malls Get New Life As Senior Housing.
This didn’t come from completely out in left field. There’s been a lot of talk about perhaps-permanently troubled troubled retail properties becoming different types of destinations, such as for entertainment and services such as spas, movie theaters, dining establishments, bowling alleys, etc. Obviously, covid pushes the timetable back, but again, we have the idea of transformed property use. Hunting around, other such things have come out:
- Will Dead Malls Be The Next Logistics Hubs from The Real Deal back in 2017
- Retail-To-Residential Conversions Are In Cards At Americas Doomed Malls more recently from The Real Deal
- A Case For Turning Empty Malls Into Housing from Bloomberg
- Retail-to-Warehouse Conversions Gain Momentum from from NAIOP Commercial Real Estate Development Association
Discussion of land-use transformation has thus far been focused on malls, because that has, lately, been the poster child for ghost or ghost-to-be properties. But actually, it can apply to any type of property the economic usefulness has been badly compromised (at least as long as it’s not in a perennial zoning-based political combat zone such as New York City, which tend to not be hotbeds for REIT activity).
This is the contrarian case, the potential for economically damaged REITs to reinvent themselves in more rewarding ways.
But we can’t pick blindly. We need a way to get from possibility (where depressed REITs now are) to potential, and hopefully from there, on to probable (ending, we hope, in actual).
From Possibility To Potential: Enter Mr. Market
Ben Graham and Warren Buffett famously talk of Mr. Market as a mythical being who is manic depressive, always bouncing between being overly elated (and willing to buy stocks for ridiculously high prices) and overly depressed (desperate to sell even great stocks for insanely low prices). Therapy-deprived Mr. Market is the patron saint of the contrarian investing case. He’s also added a lot of fun and romance to the investing process.
Whether he’s really a moneymaker or not is a much more challenging question. We’re so far now into the information age, we can no longer refer to it as a new phenomenon. There are generations of investors who can’t even comprehend having to find out a stock price by telephoning a human broker or waiting the next day to look it up in the micro-sized type that characterized the daily stock tables in the Wall Street journal or some other “newspaper” (yuk, phooey); seeing a company’s financials without having to telephone the company and begging someone to send you reports faster than via Third Class Mail or going to the local library toting a suitcase full of coins for the photocopy machine; or running out to meet the mail carrier the day you expect your monthly S&P Stock Guide to arrive.
The world out of which the Mr. Market legend rose vanished a long time ago. Mr. Market lacked knowledge (hence old-time characterization of the Street as an ignorant herd). Today, everybody has it. Differences exist in how information is interpreted. But the information is there. So it’s dangerous to dismiss trends as manifestations of ignorance.
But REIT stocks have trended horrifically. Doesn’t this tell us that Mr. Market, knowing the facts, as he does, still hates them?
Yes . . . and no.
It depends on what you look at. If you look only at stock prices, then the answer is, indeed, a negative one. But Mr. Market is not just any old mythical being, As mythical beings go, he’s quite well-rounded and speaks in multiple languages and delivers multiple messages. If we dig deeper, we can spot messages that suggests some REIT stocks warrant more interest today than recent stock price trends, viewed in isolation, might suggest.
Extracting Six Speculative REIT Ideas From Mr. Market’s Sub-text
My starting point is the Chaikin Analytics 20-factor fundamental-technical Power Gauge model. There’s a lot to it and you can see the factors here. The upshot is that it’s very difficult, for a stock to be favorably ranked unless Mr. Market, communicating through a wide variety of dialects, is giving it a thumbs up. This is especially so for REITs, with their unique financial formats that often produce poor grades in fundamental factors. When any REIT is ranked Bullish or Very Bullish under this model, that alone is ground to sit up and take notice. This requirement is, therefore, my starting point.
Usually, I hunt for ideas by building screens that have multiple tests. But other than a favorable Power Gauge rank, I keep my screening here informal. I created a wide variety of screens using different combinations of Mr. Market-type Power Gauge factors and focused on the names that kept appearing again and again. I take this looser approach because I care not about any specific algorithm but a general sense of Mr. Market showing distinctively bullish inclinations among stocks left for dead by most investors. Inclinations in general are more important to this type of search than any specific manner in which those inclinations are expressed. Generally speaking, in addition to an overall favorable Power Gauge rank, the Power Gauge factors I considered are:
- Relative Strength vs.Market (a six-month proprietary measure relative to S&P 500)
- Chaikin Money Flow
- Price Trend (as measured by Chaikin Analytics using 200-Day Double Exponential Moving Average)
- Volume Trend
- Short Interest
- Insider Activity
The Chosen REITs
Here are the REITs that emerged from this hunting expedition. All are deeply challenged now. Some have eliminated dividends already.
I have no information that suggests any sort of repurposing or transformation of properties; nothing has been disclosed and I don’t seek or use inside information. The relevance of the property-transformation theme is that it opens my mind to possibilities not discernible through conventional sources (i.e. financials, management public statements). The relevance of the Mr. Market material is to point me to places where good things that aren’t normally visible to public investors might be happening. This is a category of speculation: Make no mistake about that. But sensible speculation is a legitimate part of the trading/investing landscape.
Remember, all of these REITs are struggling right now. The investment/speculation cases here involve looking to Mr. Market for cues to potential change — for the better —that are not conventionally visible to investors doing conventional analysis.
Alexander & Baldwin
Hawaii-focused REIT with 47% exposure to Essential Retail/Restaurants, 32% to Ground Leases/Industrial/Office and 21% to Non-Essential retain. Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Bullish
- Insider Activity: Bullish
- Price Strength: Very Bullish
- Short Interest: Very Bullish
- Volume Trend: Bullish
Apple Hospitality
Apple Hospitality REIT (NYSE:APLE) is a geographically-diversified portfolio of “rooms-focused” (i.e. not resort-like) hotels with 58% in suburban locations, 21% urban, 5% resort, and the rest near airports, near interstates or in small urban areas. Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Bullish
- Insider Activity: Very Bullish
- Price Strength: Bullish
- Short Interest: Bullish
Condor Hospitality
Condor Hospitality Trust (NYSE:CDOR)'s portfolio includes upper-midscale and upscale hotels (mainly Marriott and Hilton) located in secondary markets primarily in southeastern US and Texas. Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Very Bullish
- Price Strength: Bullish
- Short Interest: Very Bullish
- Volume Trend: Very Bullish
CorePoint Lodging
Select-service (i.e. food offerings; no full-service restaurant, free WiFi, parking and breakfast) mainly in midscale and upper-midscale market segments with significant presence in drive-to-destination locales; 50% of properties in Texas (19%), Florida (18%) and California (13%); 55% in suburban locations, and 16% near airports. Very Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Bullish
- Insider Activity: Very Bullish
- Price Strength: Very Bullish
- Relative Strength vs. Market: Bullish
- Short Interest: Bullish
- Volume Trend: Very Bullish
New Senior Investment Group
Tenth largest senior living housing operator with 100% private-pay clientele; diversified across 36 states with 65% of properties located outside of major metropolitan areas. Given all the covid-related problems that have heavily impacted this entire business, including SNR, the presence of any Bullish or Very Bullish indications relating to the stock has to be deemed eye-catching. Very Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Very Bullish
- Insider Activity: Very Bullish
- Price Strength: Bullish
- Relative Strength vs. Market: Bullish
- Short Interest: Very Bullish
- Volume Trend: Very Bullish
Whitestone REIT
In an August 26th article, I described this as a “white-knuckle choice. It’s a retail REIT — but not malls. It has neighborhood centers in high-income areas in business-friendly growing areas; Phoenix and Texas (Houston, Dallas Austin and San Antonio)” and mentioned that its use of “‘psychographics’ (analogous to what ‘analytics’ does in sports), WSR carefully orients its properties to chosen consumer types.” Very Bullish overall rank.
Noteworthy Mr. Market-type Power Gauge factor scores:
- Chaikin Money Flow: Bullish
- Insider Activity: Very Bullish
- Price Strength: Bullish
- Short Interest: Bullish
- Volume Trend: Very Bullish