We saw several insiders of real estate investment trusts or REITs purchase shares this week. The buying was broad based across multi-family, office, retail and diversified REITs. When discussing alternative income options earlier this week, we wrote the following about REITs,
The other asset class that yield hungry investors flocked to was real estate investment trusts or REITs. The Vanguard Real Estate ETF (VNQ) with nearly $35 billion in assets is down more than 28% year-to-date. The drop in the value of REITs has helped the yield of all equity REITs trend up to 3.99% (as of September 23, 2022). There is obviously quite a bit of variability in the yields offered by various sub-sectors as you can see from the table below (provided by NAREIT).
Some of these REIT sub-sectors are starting to look interesting and I am watching a diversified REIT that was a spotlight idea in our September 2022 Special Situations Newsletter closely. While REIT yields are up, we are not at a point where increasing exposure to REITs makes sense because of some fundamental headwinds they face. After years of refinancing their debt at lower interest rates, they will now have to refinance at higher rates. Unless they have pricing power in the markets they operate in, this could translate into lower payouts.
One of the more interesting REIT purchases this week was that of the small-cap apartment REIT, BRT Apartments Corp (BRT). CEO Jeffrey Gould acquired 39,173 shares at an average price of $20.69 per share for a total amount of $810,529. Unlike other REITs, BRT’s stock has shown a lot of strength and is actually up 9.95% over the last year despite a recent pullback. The stock is trading above pre-pandemic highs and Mr. Gould has a history of buying stock during pullbacks, which has served him well as you can see from the 5 year price chart of BRT below.
BRT sports a dividend yield is 4.82%, and and the payout ratio is 76.8% based on funds from operations (FFO). The payout ratio based on net income is lower because there was a big spike in net income from selling certain joint venture properties. This is one of many reasons why REIT investors focus on FFO or adjusted funds from operations (AFFO) instead of net income. It was good to see that as of March 31, 2022, the occupancy rate for the company’s apartments was 96.4%. Well run multi-family REITs generally have occupancy rates north of 95% and the lowest I remember quality REITs like Avalonbay (AVB) dip to during the Great Recession was an occupancy rate in the low 90s. A big drop in the price of Avalonbay by the first quarter of 2009 translated into a very juicy yield of 8%. I don’t think we will get to those levels but I would be interested in nibbling on multi-family and diversified REITs if I see them get to the 6% or higher yield level.