The REIT market has fallen on hard times. Over the past year, the Dow Jones Equity All REIT index has lost 16.4% of its capitalisation, while the S&P 500 has been down 15.5%. In Q3, the difference was even greater, with the Dow Jones Equity All REIT yielding -10.8% versus -4.9% for the S&P 500. As a result, many property trusts now trade at a discount to Net Asset Value (NAV).
Thanks to market conditions and a substantial reserve of unused cash, Blackstone, the world’s largest Alternative Asset Management company, has had great opportunities to expand its portfolio. The company has recently bought a number of real estate investment trusts, indicating potential growth in these trusts in the coming months.
The state of the real estate market
Founded by Wall Street legends Stephen Schwartzman and Peter Peterson, Blackstone is widely known for its large-scale LBO transactions within the Private Equity segment and active operations in the real estate market.
The company has grown its Assets Under Management (AUM), even in times of bear markets. For example, at the end of Q2, Blackstone had $940.8 billion (£820.5 billion) in assets under management, compared to $684 billion (£596 billion) a year earlier.
Blackstone’s recent asset allocation has been so successful that its inflows have far outstripped its deal volume. As a result, the stock of “dry powder” (cash that has not yet been invested in any assets) has reached an unprecedented $170 billion (£148 billion), of which $59 billion (£51 billion) is earmarked for real estate deals.
Blackstone has paid a premium for REITs such as American Campus Communities, QTS Realty Trust and Public Storage Business Parks to name a few. Assessing their current portfolio; 71% of the company’s properties are concentrated in the so-called Sun Belt area in the south and west of the US – 55% of which is rental housing.
Based on Blackstone’s past buying pattern, these REITs stand out as likely future candidates of the company’s investment meaning investors in these could reap solid returns if the investment giant sets their sights on these trusts.
Tricon Residential Inc. (TCN)
Founded in 1988, Tricon Residential (TCN) specialises in rental housing. The company owns and manages approximately 31,000 homes in 21 markets in the US and Canada.
Tricon Residential complements Blackstone’s property portfolio because, like the private stock giant, most of Tricon’s properties are located in the US Sun Belt region. Unlike Blackstone, Tricon has a strong presence in California, which also increases the company’s appeal in the eyes of a potential buyer. The fact that Blackstone had already invested $300 million (£26 million) in Tricon Residential in August 2020 is a key factor indicating the high probability of a takeover.
There was a similar case with the recently acquired Extended Stay America, in which Blackstone bought a small stake back in spring 2020. The minimum price target from investment banks set by Citigroup is $12.50 (£10.89) per share. Raymond James, on the other hand, values Tricon at $16.50 per share. By consensus, the fair market value of the stock is $14.50 (£12.63) per share – which implies a 78.3% upside potential.
Apple Hospitality REIT (APLE)
Apple Hospitality (APLE) is a real estate investment trust that owns one of the largest portfolios of upscale hotels in the US. The Apple Hospitality portfolio consists of 235 hotels with more than 30,000 rooms located in 34 states.
Speaking at the Hunter Hotel Investment Conference at the Marriott Marquis Hotel in Atlanta, Tyler Henritze, senior managing director of Blackstone, said Blackstone’s overall involvement in the hotel business was at a “historically low level” and said the company expected to increase its presence in this market. It is hard to find a better target for expansion in the hospitality market today than Apple Hospitality.
This REIT owns one of the largest portfolios of upscale hotels in the US, which includes more than 200 properties, mostly under the Marriott and Hilton brands. While hotel occupancy rates have increased by 10 percentage points over the past year, the figure is still 4 percentage points lower than before the pandemic. Management notes a steady growth in demand. A recovery in leisure and business travel is likely to further boost Apple Hospitality’s earnings. In addition, a return to pre-pandemic dividend levels is also possible.
For investors looking to capitalise on the growing demand for travel and related services, Apple Hospitality represents an attractive opportunity. Blackstone is just such an investor. The minimum price target from investment banks set by Wells Fargo is $17 (£14.81) per share. Oppenheimer, on the other hand, values Apple Hospitality at $23 (£20.04) per share. By consensus, the fair market value of the stock is $20.10 (£17.51) per share – suggesting a 36.9% upside potential.
Chatham Lodging Trust (CLDT)
Chatham Lodging Trust (CLDT) is a real estate investment trust specialising in investments in high-end long-stay and premium hotels. It holds interests in 86 hotels with 12,040 rooms, including 40 wholly owned properties with 6092 rooms in 15 US states.
One of Blackstone’s notable deals was the LBO buyout of Hilton Hotels in 2007. This deal was the talk of Wall Street corporate circles and brought widespread publicity to the investment giant. Chatham Lodging Trust could be Blackstone’s next potential bet on the hotel sector. Although this REIT has a fairly small capitalisation, its profile matches Blackstone’s interests perfectly. With a wealth of experience in the hospitality industry, Blackstone nevertheless prefers the premium segment.
Chatham Lodging’s main markets are California and Texas. The company’s financial performance has shown steady growth amid a recovery in tourism and business travel. Most importantly, Chatham Lodging is trading at a substantial discount to net asset value. The minimum price target from investment banks set by Barclays is $15 (£13.06) per share. Oppenheimer, on the other hand, values Chatham Lodging at $20 (£17.42) per share. By consensus, the fair market value of the stock is $16.50 (£14.37) per share – suggesting an upside of 56%.
Independence Realty Trust (IRT)
Independence Realty Trust (IRT) is a real estate investment trust that owns and manages multifamily properties in US markets, including Atlanta, Louisville and Memphis. IRT’s investment strategy is to expand in key markets with developed infrastructure.
Blackstone’s significant bet on rental housing is no accident. Today, a potential recession is one of the key uncertainties in the market. However, no matter how deep the economic crisis, people still need somewhere to live. This fact makes rental housing one of the most resilient segments of the economy. What’s more, a recession may even stimulate demand for rental properties.
The protective properties of property trusts investing in rental housing are known to the market and this is reflected in the high value of such REITs. However, Independence Realty trades at a discount to net asset value, which is a consequence of market inefficiencies rather than fundamental flaws in the trust. About 70% of Independence Realty’s net operating income comes from the Sun Belt, which will allow the company to benefit from active migration to the region.
High taxes and the cost of living in places like California have led to a surge in migration to cities such as Austin, Dallas, Phoenix and Atlanta. IRT’s real estate portfolio has extensive exposure in these cities. In addition, Independence Realty has a growing financial performance and is also highly resilient in times of inflation, as 95% of its debt has a fixed interest rate. The minimum price target from investment banks set by KeyBanc is $25 (£21.78) per share. BTIG, on the other hand, values IRT at $27 (£23.53) per share. By consensus, the fair market value of the stock is $26 (£22.65) per share – implying a 67.9% upside potential.
NexPoint Residential Trust (NXRT)
NexPoint Residential Trust is a real estate trust focused on Class B affordable housing developments in the Sun Belt states, which are characterised by strong job and population growth. The REIT also employs a value-added strategy in which it buys distressed housing and carries out improvements that provide a higher return on investment.
Despite the overall resilience of the rental housing market, NexPoint’s relatively affordable Class B flats are even more attractive properties, as more than two thirds of working Americans can afford to live in them. In addition, the company’s value-added strategy allows for higher rental rates. In the second quarter, for example, NexPoint completed 650 home improvements, 609 of which were rented out, yielding a return on investment of around 25%.
Over the years, NexPoint has seen strong growth in net operating income per site (Same Store NOI) and operating cash flow (Funds from operations). The company also has a strong track record of double-digit dividend growth. In the first half of 2022, its dividend increased by 11.8% year-on-year. NexPoint is running like clockwork. By acquiring NexPoint, in addition to a sustainable and highly profitable enterprise, Blackstone could also gain quality expertise in value creation in the Class B apartment market and leverage the company’s expertise on other properties.
The minimum price target from investment banks, set by Truist Securities, is $66 (£57.52) per share. Compass Point, on the other hand, values NexPoint at $90 (£78.43) per share. By consensus, the fair market value of the stock is $75.70 (£66) per share – suggesting an 89.3% upside potential.