Market Commentary | May 21, 2024


Patient Money

Strong economic news from March dashed hopes of a June rate cut and in response, the MSCI REIT Index declined more than 7% in April. Moderating CPI and jobs data earlier this month caused REIT prices to rebound significantly in May, but we want to emphasize that our investments are not motivated simply by the vicissitudes of interest rates or other macroeconomic metrics. Our focus is to identify value and growth opportunities and to trade those issues for optimal results. As a current case in point, we present BSR REIT (BSRTF).

Signs of Life in Multifamily

BSR Real Estate Investment Trust is a small-cap Arkansas-based REIT that IPO’d its shares on the Toronto stock exchange in May 2018. We first identified the shares as cheap in February of 2021 as the COVID pandemic had ravaged rent collections for apartment landlords. We bought shares and held them until 1Q2022 when the migratory shifts of work-from-anywhere allowed Sun Belt multifamily operators to raise rents by double digits. Rents rose and apartment REIT shares rose even further; BSRTF was no longer cheap, so we cashed out.

Rents continued to rise until the start of 2023, but that was just enough time for developers to bring an unprecedented tsunami of new apartment supply to these hot Sun Belt markets. Multifamily REITs earnings stopped growing and share prices began a long decline. By 3Q2023 BSRTF shares had fallen to $12 and just kept falling. BSRTF was trading at an FFO/share discount to peers and a 35% discount to its Net Asset Value. We became active BSR buyers.

One-time darlings, multifamily REIT shares languished this spring in the headwind of higher interest rates and the surplus of new supply. All enthusiasm for apartment investing seemed to have vanished until on April 8th mega real estate manager Blackstone (BX) announced that it was acquiring Apartment Income REIT (AIRC) at about 92% of its net asset value (and a huge premium to market price). Other multifamily REIT shares rose on sympathetic hope that their values would be similarly realized and BSRTF shares stabilized.

It’s different this time

Moderating inflation in this month’s economic reports has buoyed financial markets and BSRTF shares are up 9.3% from their April 30th closing price. We are back above our costs, but we don’t have an interest in selling at $11.70/share. The Blackstone/AIRC transaction opened our eyes to the shares’ potential value.

At $11.70, BSRTF is trading at 12.4x management’s 2024 FFO guidance and just 68% of the newly stated $17.21 NAV. BSR management has historically put their money where their mouth is, and recent financial filings demonstrate that behavior continues today.

On April 1st, BSR filed notice that John Bailey had made open market acquisitions of BSRTF shares and, combining this with management’s other activities, management now controls almost 21% of shares outstanding. This filing has not escaped the notice of institutional investors and they have materially enhanced their holdings; Milwaukee’s Heartland Advisors now holds 1MM shares (3% of outstanding), for example.

Biding our time

Management’s demonstrated confidence and enhanced institutional interest make us believe these well-informed investors see a lot more upside in BSRTF shares. Until we see pricing approaching the $17 NAV, we are content to collect the very tax-advantaged 4.4% monthly dividend and wait for the upside.

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

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