Market Commentary | June 17, 2022
Independent of the Market
In the days leading up to the Bureau of Labor Statistics’ June 10th release of the May 2022 Consumer Price Index (CPI), investors crossed their fingers in hope that inflation had peaked and was beginning a retreat. No such luck; the BLS reported that over the last 12 months the all items CPI had increased 8.6%. On June 15th, the Fed hiked interest rates by 0.75% as a cudgel to beat down inflation.
The table below describes how 4 different, but related, investments priced over the two-week period described above.
Yields on the two short-term Treasuries rose in anticipation of the Fed’s action. That makes sense. The price of the Vanguard Real Estate Index Fund (VNQ) fell 9.77% because real estate investment is believed to be sensitive to interest rates. In certain circumstances that may be true, but it is not an accurate perception for REITs today.
Today REITs carry less than half the debt level that they had coming out of the financial crisis. More importantly, almost every REIT has taken advantage of the historically low-interest rates of the last 10 years and locked in long-term, fixed-rate debt. Changes in short-term rates will have almost no impact on near-term operations.
BRT Apartments (BRT) is our largest exposure to multifamily housing and happens to be the best-performing apartment REIT in 2022. Over the last two weeks, BRT’s share price fell by 3.8%. Does that make sense?
On June 8th, BRT’s Board of Directors declared a quarterly dividend of $0.25/share, an 8.7% increase over the prior dividend (and following a similar such increase in 2021). On June 14th, BRT announced completion of the sale of Retreat at Cinco Ranch in Katy, TX, recognizing a $16.5MM gain on the sale. BRT is expected to close the $92MM sale of VIVE at Kellswater in Kannapolis, NC. They will use proceeds from these sales to buy-in JV interests in other appreciated properties.
While BRT shares are outperforming the market, they are still priced at a 42% discount to consensus NAV. They trade at 18x 2022 consensus FFO vs. the 22.5x multiple of their peer set. BRT’s Funds From Operations are expected to grow 11.5% in 2023. So, no, we don’t think markets always make sense.
Fear creates market volatility that can give investors a brutal beating. Our response, as always, is to guard our capital, remain vigilantly knowledgeable of our companies’ operations and values, roll with the punches, and seize opportunity when we see it.
Notes and Disclosure
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