Buy The Dip: 3 REITs Getting Way Too Cheap

Right now, REITs are historically undervalued, trading at an average 10% discount to net asset value (‘NAV’):

This is based on the conservatively calculated NAV estimates of GreenStreetAdvisors, which is the leading institutional-quality REIT research firm in the world.
If you used the NAV estimates of regular analysts who follow REITs, the average discount to NAV would expand closer to 20% and it is not uncommon to find even high-quality REITs trading at greater than 30% discounts.
That’s exactly what we look for at ‘High Yield Landlord’.
We want to buy good real estate that’s professionally managed, diversified, and liquid at a steep discount to fair value. You don’t need to be a rocket scientist to understand that such investments will likely generate attractive returns over time.
REITs (VNQ) always eventually recover and return to slight premiums to NAV, which is where they should be given that they are essentially liquid real estate.

NAREIT
Today, we are fortunate to have the opportunity to accumulate REITs at exceptionally low prices and we will continue to do so, week after week, with small gradual additions to our favorite holdings.
In what follows, we highlight 3 of our recent purchases:
Based on Price-to-NAV, Clipper Realty is the cheapest of all apartment REITs in the USA. After the recent drop to $8.5 per share, it is now priced at a near 50% discount to the estimated fair value of its properties.
It is so cheap because it is a small-cap that’s overlooked by most investors and also because it is mainly invested in New York City, which is currently out of favor. Its biggest property, the Flatbush gardens located in Brooklyn, is probably also a cause for concern to some investors due to its troubled history.
I also shared a healthy dose of skepticism regarding the Flatbush Gardens. Looking at pictures online and reading reviews, it seems like these are the type of properties that you would soon tear down and rebuild, at least here in Europe.
To get a better feel for the properties, I recently flew to NYC to tour them and my impressions were very positive.

In short, my concerns weren’t really warranted. These are good assets and it also explains why CLPR was able to get a large loan with attractive terms, secured by these assets. They were built as public housing and this side of Brooklyn is not exactly prime real estate, but they provide affordable housing that’s badly needed.
I also visited CLPR’s other major assets in Brooklyn and Manhattan and I liked what I saw.

Today, rents are soaring in NYC as the city continues to recover from the pandemic, and these properties are directly benefiting from it. Occupancy rates are now reaching a point that will allow CLPR to push for large rent hikes in the coming quarters. Local real estate agents have described the NYC rental market as “red hot” with 20%+ rent hikes becoming the norm.
Yet, the company is priced at a 50% discount to NAV. A local private equity real estate investor who knows the market’s ins and outs recently highlighted CLPR as the best way to invest in NYC real estate in a 1-hour long podcast that you can listen to by clicking here.
The company’s biggest shareholder is the management, and they bought back a lot of shares during the pandemic. We think that buybacks will soon resume if the share price remains so low. We expect 50%+ upside and while you wait, you earn a near 5% dividend yield.
Whitestone REIT has a very simple investment case.
The REIT owns highly desirable assets, but it has historically been discounted due to its management, which was conflicted and overpaid.
The REIT finally resolved these issues earlier this year after firing its CEO and hiring a new management team that’s laser-focused on creating shareholder value.
The share price rapidly began to rise, but as the market began its dip, WSR gave up nearly all of its gains.
As a result, it is now still priced at just 10x FFO and an estimated 30% discount to NAV, and that’s despite having guided for 15%+ FFO per share growth in 2022.
The REIT owns strip centers that focus on essential services which are largely e-commerce-, inflation-, and recession-proof. Their rents are growing rapidly because its properties are almost entirely located in growing sunbelt markets like Phoenix, Arizona, and Austin, Texas:

As we explain in our investment thesis, WSR really deserves to trade at around 15x FFO given its rapid growth prospects and improved management.
This means that the shares have ~50% upside potential and while you wait, you earn a near-5% dividend yield.
Macerich is the owner of the highest-quality mall portfolio in the USA.
Malls are perceived to suffer from the growth of e-commerce and they are also perceived to be cyclical assets that suffer from recessions. Adding more fuel to the fire, MAC is heavily leveraged, leaving little room for error.
Nonetheless, we are bullish and like the risk-to-reward of the company.
In short, we disagree with the common wisdom, and actually believe that e-commerce will benefit Class A malls in the long run. That’s because it is leading to market consolidation with the lowest quality malls dying and the strongest malls getting stronger. Moreover, increasingly many retailers are consolidating their shops to the best malls as they adapt to the new omnichannel world. Finally, even digital native retailers are now opening new stores at Class A malls as it helps them increase sales, reduce costs, solve logistical issues, and boost brand recognition:

Malls are somewhat cyclical, but the highest quality malls are not as cyclical as implied by MAC’s recent share price performance. Priced at less than 5x FFO, a ~70% discount to NAV, and offering a 6.5% dividend yield, we like the risk-to-reward as part of a well-diversified REIT portfolio.
The primary risk remains the balance sheet, but MAC has done a good job at mitigating this risk over the past year, and it is focused on paying down debt with its retained cash flow.
Volatility creates opportunity.
We shouldn’t fear it. We should welcome it.
Sure, it may not feel nice to stare at a screen full of red color, but if you want to earn market-beating long-term returns, you need to become comfortable with volatility.
It leads to market inefficiencies and serves us bargains, which will ultimately lead to larger gains in the long run.
I like to regularly remind our members that our portfolio dropped by over 50% at the worst point of the pandemic, and despite that, our portfolio is today trading at near all-time highs.
That’s because we were able to take advantage of the volatility and made highly profitable investments when others were fearful.
Today, the volatility is not quite as significant, but opportunities remain abundant and we continue to slowly accumulate larger positions in our favorite positions.