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Serenity Alternative Investments Blog - Distress Signals: Finding Opportunity In REIT Volatility
March 2020
Serenity Alternative Investments Blog - Distress Signals: Finding Opportunity In REIT Volatility
The volatility monster has awoken from its slumber to once again terrorize investors of all stripes. Coronavirus concerns have created havoc in the stock market and put an abrupt end to the 11-year expansion in the US economy. As market psychology has flipped from extreme greed to extreme fear in a matter of weeks, REITs have been caught in the wave of selling, falling to valuation levels not seen since the 2008 financial crisis.
While the broader impact of the coronavirus is not yet fully known, and it’s too early to start betting on a recovery, certain REIT portfolios are trading at fire-sale prices. REITs have fallen 40% from peak to trough since mid-February, with some REITs falling over 60% in the same time period. Real estate prices, in the meantime, have not changed nearly as significantly in such a short period of time.
The result is a REIT market in which 95% of REITs trade at discounts to the value of their underlying real estate, with the median REIT trading at a 43% discount. This indicates that the average REIT is pricing in significant deterioration in fundamentals, and certain REITs are pricing in an outright 2008 style disaster.
But this is not 2008. REIT balance sheets are in significantly better condition than they were into the last recession, the REIT universe is much more diversified, and management teams are much better equipped to deal with a downturn than they were the last time REITs traded at such steep discounts.
In our view, this creates opportunity. It is NOT time to sound the all clear on REITs and buy with both hands. It is still unclear what long-term effects a global pandemic will have on the real estate market. There are, however, opportunities to buy select high quality REIT portfolios at huge discounts. High quality real estate has an excellent track record of surviving economic shocks, and iconic portfolios in the REIT market only go on sale once every few years. For those that want to be a bit greedy when others are fearful, here are two REITs with irreplaceable portfolios and excellent balance sheets trading at highly discounted valuations.
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