We are in a bear market.
The major indices (SPY; QQQ; VNQ) are down 20% or more and more investors are selling their positions, fearing things will get even worse.
I do the exact opposite. I recognize that it is impossible to time the market, but I also recognize that those who continue to accumulate larger positions during bear markets have always earned the greatest rewards during the recovery.
Today, it may seem like “this time is different” and the market has only one possible path, and that is down.
But in reality, today’s uncertainty is nothing out of the ordinary. Of course, inflation is high, interest rates are rising rapidly, and we are likely heading into a recession.
But then what?
It’s not like we haven’t experienced things like this before. And yet, the market always eventually recovers and richly rewards those who are brave enough to buy the dips.
“In the 20th century, the United States endured two world wars and other traumatic and costly military conflicts; the Depression; a dozen recessions and financial panics; oil shocks; an influenza epidemic; and the resignation of a disgraced president. Yet the Dow fell from 66 to 11,497.” warren buffet
Could prices fall further before recovering? Maybe. But it’s impossible to know. Valuations today are already exceptionally low in some sectors of the market and, as Buffett likes to say:
“Forecasts can tell you a lot about the forecaster; they tell you nothing about the future. warren buffet
In other words, it is absolutely impossible to predict how the market will behave during the month, quarter or even year.
To prove my point, consider the following: how many people correctly predicted that within a year of the pandemic sell-off, the market would have fully recovered, and more? And this despite the worst economic contraction in history and serious supply chain problems around the world.
The answer is nobody.
What happened was that after a brief period of panic, the market came to its senses and realized that 1-2 years of poor results have little impact on the fair market value of companies. Stocks often sell because investors are too focused on short-term results, but if you’re a long-term investor, you can keep an eye on the bigger picture and take advantage of market excesses. Regardless of the magnitude of the crisis, it should not significantly change the value of a company as long as it is temporary. Yet, because the market is so short-sighted, it’s not uncommon for stocks to drop 20, 30, 40, or even 50 percent on fleeting fears that surely won’t last long.
This year, a few sectors in particular have fallen and become very opportunistic for long-term oriented investors.
These are REITs, asset managers and some specific sub-sectors of the technology market.
Personally, I mainly invest in REITs and other real estate businesses because they offer the best risk-reward ratio in my opinion. As I have explained in previous articles, these stocks are today valued at historically low levels, although they offer superior protection against inflation and are not so strongly affected by the rise in prices. rates and recessions.
You can see below that REITs generally outperform in all three scenarios:
- Rising interest rates
- High inflation
It also makes logical sense.
- These companies don’t use a lot of debt and the debt is long term fixed rate. Consequently, the impact of rate increases is not significant in most cases.
- Moreover, they profit from inflation because it increases the value of their real assets and allows them to spend larger rent increases, even if it also deflates the real value of their debt.
- Finally, rents generally do not change significantly during a recession. Real estate is generally essential to the tenant and landlords derive stable income from long-term leases.
Despite this, these companies have particularly fallen and now offer a once-in-a-decade opportunity to accumulate real estate at bargain prices.
Below, I highly recommend 2 REITs we are accumulating at High Yield Landlord for our core portfolio:
Real estate is all about renting, renting and renting…
If you own a good property in a rapidly growing market, you can enjoy significant returns as your rents increase and the property appreciates in value.
This has been the case for many Texas cities over the past few years.
Cities like Austin, Dallas and, to a lesser extent, Houston have been great markets for real estate investment as more and more companies have decided to locate there to reduce taxes and improve profitability.
There is a long list of companies that have taken the plunge in recent years. This includes Tesla (TSLA), Hewlett Packard (HPE) and Oracle (ORCL).
As businesses move in, they bring jobs and people with them. Most people are also happy to move there as it allows them to lower their taxes and increase their disposable income.
This has led to rapid population growth and an increasing demand for real estate, which has not been met by sufficient new supply, in part due to all the construction delays caused by the pandemic.
As a result, rents and property values have skyrocketed and BSR REIT (OTCPK:BSRTF/HOM.U) is one of the main beneficiaries.
Unlike most other apartment REITs like Camden (CPT) and Mid-America (MAA), BSR decided to follow a concentrated strategy, and today the majority of its portfolio is invested in Texas.
And wow, did it pay off for them!
Their net asset value per share has increased 150% year over year. It fell from $14.77 to $22.35 at the end of the last quarter.
And the growth is not over.
In the second quarter, the RNE of the same community increased by 16.7% year-on-year, while the mixed rental growth was 12.6%. Meanwhile, AFFO per share jumped 26.7%.
Despite this, BSR has recently sold off heavily and as a result it now trades at just $17 per share, which represents a 25% discount on the value of its properties, net of debt.
How often are you lucky enough to buy highly sought-after real estate whose rents are rising so rapidly at just 75 cents on the dollar? You also benefit from diversification, liquidity and free professional management.
Rising interest rates only make housing less affordable, forcing more people to rent. Inflation benefits BSR by allowing it to further increase rents. And a recession is unlikely to have a significant impact on BSR since it focuses on affordable Class B communities.
We are forecasting a 40% upside and waiting for the recovery, we are getting a monthly dividend yield of 3%. If the market fails to revalue the BSR higher, I would expect a company like Blackstone (BX) to buy it back. They have been buying residential REITs left and right and they recently made the following statement:
“The best opportunities today are clearly in the on-screen public markets and that’s where we spend a lot of time.” Jon Gray, COO of Blackstone
Clipper Real Estate
Clipper Realty (CLPR) is similar to BSR in that it also invests in affordable Class B apartment communities and enjoys rapid rental growth, but the main differences are that it focuses on NYC in the Texas location.
NYC has been hit harder by the pandemic and this has hurt CLPR’s market sentiment. But COVID-19 is now definitely in the rearview mirror, exemplified by the 97.3% rent collection rate in the second quarter (virtually the same as its pre-pandemic level).
Driven by 7.6% growth in residential revenue, CLPR’s AFFO per share of $0.12 was up 20% from last year’s $0.10 in the second quarter. None of the REIT’s secured debt matures until 2027, and it has plenty of cash ($44 million in cash) available as a cushion as well as for investment purposes.
Despite this, CLPR is still trading at a massive 45% discount to NAV, which makes little sense given the rate at which its rents are rising and the many catalysts ahead.
It was recently reported that CLPR has put their biggest asset up for sale and we are currently trying to arrange a management interview for the members of High Yield Landlord.
We think CLPR could sell it at a price that would imply a much higher valuation than its current price implies. He could use part of the proceeds to buy back shares and/or also sell the rest of the company to finally close the discount.
Management is heavily invested, nearing retirement and may be looking for a way to cash out.
We estimate that CLPR is trading at around half of its net asset value, which means it offers up to 100% upside potential at best, and until that value is unlocked, we are earning a yield dividend of nearly 5%.
The vast majority of seizures are only temporary.
We have been through world wars, pandemics, periods of even higher inflation, cold wars and many other crises. Despite this, the market has always recovered, and this time will be no different.
This is why the best time to invest is when prices are heavily discounted and this is the case today in the real estate segment of the stock market.
Following the crash of 2008-2009, REITs nearly tripled over the next two years.
Following the pandemic crash of 2020, REITs nearly doubled the following year.
How will REITs perform after the 2022 sell-off?
While I can’t predict short-term results, I expect to be richly rewarded in the years to come, and that’s why I’m aggressively hoarding these names ahead of recovery.