Why I'm Buying REITs Amid The Selloff

On September 16, the Federal Reserve raised the federal funds rate by a quarter point to a range of 3.75% to 4%. The vote was 12 to 0. It was the first increase since July 2023.

Chair Kevin Warsh was plain about it. He said inflation is too high and has been for too long. 16 of 18 officials expect at least one more hike before the year ends.

REIT investors reacted the way they always do. They sold first and asked questions later.

According to 2nd Market Capital, the average REIT fell 4.48% in August, and 82% of them finished the month in the red. The average discount to net asset value on their tracker widened from 8.43% to 13.20% in a single month. Small caps trade at a discount of about 24%.

Here is the part the headlines skipped. Through August, the average REIT was still up 9.67% for the year. This is not a crash. It is a repricing, and repricings are where deep value investors get paid.

Our framework borrows from the LaSalle golden eras. Four conditions mattered: dislocated bank lending, negative sentiment, REIT underperformance, and easing financial conditions.

Sentiment is sour. Discounts are widening. Those two boxes are checked.

Easing financial conditions is not checked. The Fed is tightening, and the market expects another hike by December. I am not going to pretend otherwise, and neither should you. We are buying discounts into a rising rate environment, which means we demand a bigger margin of safety, not a smaller one.

That is why the balance sheet matters more than usual in this review. Our safety test calls for debt to EBITDA between four and six times, strong coverage, fixed rate long dated debt, and investment grade ratings. Where the companies disclosed their own leverage, I have said so.

While public investors dumped shares, corporate buyers went shopping. Zell told us that when everyone goes left, look right. This quarter, the right side of the field was crowded with deal makers.

Global Net Lease closed its all stock purchase of Modiv Industrial on August 12 at a 17% premium to Modiv's closing price on May 1. AvalonBay and Equity Residential closed their roughly $70 billion merger of equals on August 17 and now trade as Vivmark Residential. On September 9, Independence Realty Trust agreed to buy Centerspace in an $8.1 billion all stock combination.

The REITs themselves are buying too. 2nd Market Capital reports that REITs repurchased $2.78 billion of their own shares in the second quarter. When management teams and strategic buyers both say the stock is cheap, I pay attention.