Market Commentary | April 22, 2025

Navigating the Storm

As a fundamental starting point, we try to identify sectors producing earnings growth. The next step is to discern which companies and issues within that sector present a price point of entry that optimizes returns; are the company’s earnings growing as fast, and are the shares cheaper than those of peers?

In the fall of 2023, we liked the earnings prospects of the recently beaten-down apartment sector. America was in a seemingly unsolvable housing shortage, but an unprecedented wave of new supply had convinced investors that rents wouldn’t grow to the sky. Simultaneously, rising interest rates had shut the supply spigot off, but rents began to fall, and multifamily share prices fell further. We felt that BSR REIT (BSRTF) was opportunistically priced, owned newer properties in the growing population of the Texas Triangle, and was reporting huge insider buying. This looked like a potential buyout candidate, so we loaded up on shares and waited.

On February 27th, Avalon Bay (AVB) announced that it would buy 8 BSR communities located in Dallas and Austin. BSR commented that the $618MM sale validated their IFRS Net Asset Value claims. The market liked the transaction, and BSRTF shares jumped 9.8% on the news.

America still faces a housing shortage, but the macroeconomic environmental changes over the last six weeks have changed the shortage’s complexion. The extensive and broadly unpopular tariff levies announced in March and April precipitated a market selloff that started in the Tech stocks and then spread to every sector, including real estate.

Many believe the tariffs will exacerbate inflation and plunge the economy into recession. Recession is often accompanied by rising unemployment. Rising unemployment slows household formation. Slower household formation reduces apartment demand, and most multifamily REIT shares plummeted. On March 31st, BSR announced completion of the Austin portion of the sale to AVB, and that buoyed the shares.

We like BSR and its management, but the environment for multifamily investment will be diminished if a recession does indeed materialize. We sold shares, pocketing 18 months of dividends and a nice capital gain.

America’s housing shortage continues, so we look for investment that has fared much better in recession: manufactured housing (MH).  Despite forecasting nearly double-digit Net Operating Income (NOI) growth in recent earnings reports, the MH shares were dramatically buffeted in the March and April selloff.  We have deployed some BSRTF proceeds for the purchase of newly discounted shares of UMH Properties (UMH). We have tried to recapture growth at a better price.

We trust that our analysis often uncovers opportunity. Sometimes that opportunity is realized in M&A activity or a big asset sale like BSRTF’s. When the economic environment is dramatically changed, perspective might need to change in response. We’re ready for change across our entire portfolio.

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.

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