HOMZ And W. P. Carey Offer Growth Through Real Estate

The stellar publication The Economist brings gravitas to the real estate investment sector, despite the world still grappling with the pandemic and the recession it birthed. Its lead story for July declares:

The house wins–America’s housing market is so far unfazed by recession…Residential property-worth $35trn, slightly more than America’s stockmarket (sic)-seems strangely oblivious to the economic carnage around it.

Hitherto, real estate has not been among my picks of essential industries in an environment of crisis management investing. But taking a hint from The Economist, W. P. Carey, Inc. (NYSE:WPC) is worth strong consideration by retail value investors. A smaller company in the sister sector of real estate is Hoya Capital Housing (HOMZ) that I previously recommended. Know the former is an ETF and WPC a REIT.

Consider the Bigger Picture

Encouraging employment data have been forthcoming in recent labor reports. Doctors are sharing comforting reports about treatments, cures, and vaccines on their way. Equities markets are bouncing back. Following steep declines, real estate equities surged in the first week of July with all 18 property sectors in positive territory. Housing is back leading in the early stages of the economic rebound comparable to the big bump last May.

Another factor inter alia for considering HOMZ and WPC as worthwhile, long-term investment opportunities, is this generation is on the cusp of the greatest transfer of wealth in the history of the world. PNC predicts:

About 10,000 boomers turn 65 each day. The aging boomer population means that an estimated $59 trillion of wealth will be passed down to millennial children and heirs.

They are certain to spend some money on consumer goods, electronics, tech, and fashion, helping stimulate the economy. Lots are likely to be invested in real estate and the stock market. Millennials were already aggressively buying houses before the virus shutdowns. “The American dream of homeownership is still very much alive,” writes Frederick Peters in Forbes. The homeownership rate topped 64% when mortgage rates stood at 3.8%. They are now at just above 3%. My father’s mortgage rate in 1954 was over 4%. Improving economic conditions are a healthy portent for HOMZ.

Source Seeking Alpha

HOMZ Means Homes: Betting on Residential

The HOMZ stock price impressively fought back up after the March plummet. The price continues climbing into mid-year trading despite political turmoil, international fears of cyberwars, shooting wars, food hoarding, and recession. HOMZ is a relatively young company scrambling to attract investors. The lockdowns and economic headwinds helped suppress the HOMZ share price and volume of trade but the stock price is climbing back. Contrastingly, the share price is characterized by low volatility offering comfort to risk-averse investors looking for a safe harbor right now.

Source: Seeking Alpha

Over the long term, HOMZ enjoys momentum potential as a stable investment because:

  • Millennials will inherit money they likely will use to buy houses and HOMZ is heavily invested in homebuilders
  • Staying single longer means a healthy market for residential rental properties and property management with HOMZ invested in residential property management companies and home centers
  • Home improvement companies are seeing their shares rocket to 52-week highs
  • The states‘ millennials are reportedly considering to live off lower price housing thus spurring the potential for ETF investment growth

A downside to owning HOMZ is there are no surprises or exciting news that will gin up the share price. The buyout potential of HOMZ is nil. It will grow through organic growth and better marketing the ETF to more investors. Perhaps it is time for management to show some flexibility, too, with share prices down in some related sectors that appear to be better investments beyond homebuilders?

Hypothetical $10,000 Investment as of 05.31.2020

Growth Chart

Source Fidelity

W. P. Carey: Mature but with Warnings

WPC share price is midway between its 52-week low of $38.62 and high at $93.62. The dividend yield tops 6%. WPC is a mature $16B company. WPC is largely into industrial commercial and office spaces but demand for office spaces is expected to contract 17-30%. The industrial sector is expected to do better with more manufacturing returning to the U. S. The W. P. Carey company is one-quarter each into industrial properties, offices, and warehouses; then comes storage facilities and others.

Company holdings are two-thirds in the U.S. One-third of their holdings are in Europe. The remaining 2.1% are elsewhere. If WPC is able to forefend the devastating fall-out the virus has on retail and entertainment properties, earnings are forecast to grow nearly 32% per year. This will be the impetus for a rise in the share price closer to its former high for the year.

Source W. P. Carey

Through Q1’20, the share price was not volatile, but since then, the share price has bounced around between the low $50s crawling up to its current price ~$68. An investor might wait for another dip before plunging into a buy mode. The share price might soften going forward as the company sells $330M worth of 4.75M shares to pay down parts of its $1.8B unsecured revolving credit. Currently, interest payments are not comfortably covered by company earnings. Profit margins once topped 40% but today are nearer 25%. The +6% dividend might be a red herring, for debt troubles, profit deterioration, and share price dilution lie ahead? WPC’s debt seems manageable if anticipated growth forecasts bear out.

Source: Simply Wall Street

Think Long on Both HOMZ and WPC

Real estate investing is always in style for the rich. That’s certainly true for the wealthy people I know on three continents. Diversification is the key to cash flow and success. Investing in HOMZ gives access to residential markets. WPC gives access to the industrial, warehouse, and office markets in the U.S. and Europe. The COVID-19 storm is wreaking havoc on retail and their landlords but investors in HOMZ and WPC are more insulated from this segment. Their income generation is strong and potentially this will be reflected in their share prices. At the very least, the share prices of the ETF and REIT are less sensitive to volatility than other stock investments. I recommend waiting for WPC to dip again into the low $60s and HOMZ below $25. Then, buy and hang on until there is a vaccine. Property values traditionally rise over time offering a natural increase in the assets of HOMZ and WPC because like Will Rogers said they ain’t making more of it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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There’s now a $32 billion pile of commercial real estate loans in special servicing, the first step to debt relief

Landlords have been scrambling for debt relief on hotels, stores, office buildings and other commercial properties that sat mostly vacant over the past two months of U.S. lockdowns, with more woes on the horizon.

There is now $32 billion worth of commercial property loans in “special servicing” as of May, or more than double the late-February tally when the coronavirus deepened its hold on the U.S., according to a new Moody’s Investors Service report.

Special servicing is the first stop for borrowers seeking relief on loans bundled into commercial mortgage-backed securities (CMBS), a type of bond deal. Transfers to special servicing often happen once a default occurs, a borrower threatens to default or one looks likely.

Like at a bank, special servicers handle debt payments, but do so on behalf of bondholders instead of a single lender. They also are in charge of negotiating any workouts with borrowers, sometimes offering debt relief and other times handling a foreclosure or bankruptcy.

Lately, however, more property loans are being transferred to special servicing even while borrowers remain current on their debts, but operate in industries hard hit by COVID-19.

That’s how $975 million of property debt on the famed Fontainebleau hotel in Miami Beach hit special servicing in April.

See: Miami Beach’s iconic Fontainebleau tops list of U.S. hotels facing debt woes during pandemic

Servicer notes for May indicate the borrow wants a forbearance.

Here’s a Moody’s chart showing the spike, so far, in special servicing activity during the pandemic.

Hotels and retail hardest hit


While the roughly $550 billion CMBS market isn’t the biggest source of funding for U.S. commercial properties, it’s an important one that offers an early glimpse into the health of commercial real estate, mainly through monthly bond reports.

As of a year ago, roughly 13.5% of the $3.5 trillion U.S. commercial property debt sector was financed in the CMBS market, with banks and thrifts making up the largest funding source at 39%, according to the Mortgage Bankers Association.

Like many sectors, early signs point to landlords in the CMBS market being caught off guard by fallout from the pandemic as swaths of the American economy ground to a halt, a threat to their ability to manage significant debt loads.

Optimism about more U.S. states reopening for business gave U.S. stocks another week of gains heading into the long Memorial Day weekend, with the Dow Jones Industrial Average

gaining 3.3% on the week, leaving it only 17% off its record close on February 12, according to Dow Jones Market Data.

Still, the human and economic toll of the coronavirus is still being counted, weeks after the outbreak closed borders and led stretches of the globe to work from home.

Read: Retail sales crater a record 16.4% in April amid coronavirus lockdowns and spending slump

Retail and hotel properties have been the hardest hit in the past two months, not only in terms of the balance of loans crashing into special servicing, but also when looking at late payments, according to Moody’s data.

Late payments spiked to 11.8% in May on “conduit,” or multi-loan CMBS that have exposure to most property types, up from 8.6% in April and only 2.6% in March, per Moody’s.

The office sector has been one of the better performing assets during the pandemic, although that could change too, particularly if more companies follow the footsteps of Facebook Inc.

and other tech companies and give employees the option to keep working from home, long after the coronavirus threat is tamped down.

Read: Facebook employees may face pay cut if they move to cheaper areas to work from home

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Distress signals are flashing in U.S. commercial real estate. But will it need a TALF rescue?

Hotel rooms, office buildings and other commercial properties were lonely places last month as much of the nation operated under stay-at-home orders.

Being a property owner might have made the lockdowns feel even lonelier.

But as regions of the U.S. begin exploring ways to lift restrictive measures to contain the coronavirus and resume business, there is still plenty of uncertainty around what the toll will be on commercial properties, particularly since new protocols for returning to work, visiting the dentist and dining out are still being formed.

Read: U.S. commercial real estate braces for defaults as pandemic cuts cash flows

Barry Sternlicht, chief executive officer of Starwood Property Trust, Inc.
, this week described how hotels might begin resuming operations. “I think hotels, all hotels, will figure out how to operate with lower breakevens with fewer less-profitable parts,” he said during the real-estate company’s first-quarter earnings call.

“There won’t be restaurants, there may not be room service, but they will try to fill heads and beds and staff to demand.”

And yet, commercial property owners are starting to see a key funding spigot, namely the issuance of commercial mortgage-backed securities, a type of property bond, stage a limited comeback after the sector froze in March as the pandemic took hold in the U.S.

“CMBS is starting to show signs of life,” Jake Remley, senior portfolio manager at Income Research + Management told MarketWatch, while underscoring that some new bond deals have excluded hard-hit property types, namely hotel loans.

By contrast, a range of highly rated U.S. companies, including retail giant Apple Inc.
have borrowed a record amount in the corporate bond market through the start of this year, effectively socking away cash to offset what may be several painful quarters of business.

Read: Apple borrows $8.5 billion, joins record corporate debt borrowing spree

Those floodgates opened only after the Federal Reserve unleased its balance sheet to shore up financial markets, including laying out plans in March to buy U.S. corporate debt for the first time ever, through a series of emergency funding programs. Later, its plans were expanded to include speculative-grade, or junk-rated, company debt, which are expected to start soon.

The program open to CMBS is the Fed’s $100 billion Term Asset-Backed Securities Loan Facility, of TALF 2.0, as it’s known on Wall Street.

See: How the Fed plans to keep credit, a crux of the American economy, flowing to U.S. consumers during the pandemic

But unlike the Fed’s corporate debt facilities, TALF’s current scope is more restrictive and excludes newly issued and riskier CMBS with below-investment-grade credit ratings.

“The Fed is signaling they’re willing to support liquidity,” Remley said. But he also said the central bank is sending a message that not all types of debt are welcome, since eligibility is partially dependent on ratings. “That is going to create winners and losers and have some knock-on effects in the economy.”

Terms still could change once the facility gets up and running.

Of note, the original version of TALF for CMBS didn’t really get off the ground until about September 2009, following the 2007-’08 global financial crisis, and only ended up funding about $12 billion in loans to 87 borrowers before markets stabilized, according to a report this week from Deutsche Bank analysts.

Their chart below shows the top 10 CMBS TALF borrowers from a decade ago.

Top borrowers during the last crisis.

Deutsche Bank

A dozen debt players, including BlackRock Inc.
and Voya Financial Inc.
recently have been exploring their options in terms of investing alongside the Fed through new TALF funds, according to a Bloomberg report.

Analysts at Cantor Fitzgerald estimated a few weeks ago that returns, using leverage, could range from 6.5% to more than 20% for TALF borrowers. But that was before spreads, or the premium investors get paid over a risk-free benchmark on bonds, came crashing in from their widest recent levels.

Deutsche Bank analysts pegged 10-year AAA-rated CMBS spreads at a 52-week high of 318 basis points, which as of this week narrowed to closer to 150 basis points.

Meanwhile, U.S. stocks, including the Dow Jones Industrial Average
, continue to recover, as the Fed works to kick off TALF. Other sources of lending for distressed real estate are emerging too.

Real estate giant Brookfield Asset Management Inc.
wants to spend $5 billion to shore up retailers hit by coronavirus fallout, using its own balance sheet, existing funds and investment strategies, according to a Wall Street Journal report.

And if CMBS spreads stay compressed it would mean less upside for TALF funds, since borrowers are slated to pay the Fed 125 basis points to 150 basis points over a risk-free benchmark for access to its short term loans.

“In two weeks, the market has tightened,” Remley said. “There’s still interesting in TALF, but it’s waning to a degree.”

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Cell towers, warehouses look like safe plays in U.S. real estate By Reuters

© Reuters. Real estate signs advertise new homes for sale in multiple new developments in York County, South Carolina


By David Randall

NEW YORK (Reuters) – Some top-performing U.S. fund managers see opportunities in one of the sectors hardest hit by the coronavirus pandemic, cautiously increasing stakes in niches of the real estate market like cell phone towers and warehouses, which they see benefiting from an eventual economic recovery.

While real estate is typically considered a defensive sector, real estate investment trust (REIT) values have been slammed by the lockdown of the U.S. economy to slow the spread of COVID-19. Many retailers and restaurants are unable to serve customers in person, leaving them unable to pay rent.

Overall, the Jones Select REIT Index is down nearly approximately 28% for the year to date, almost double the 17% decline in the broad S&P 500 index.

“You’re seeing that the market is pricing in something approaching the Great Recession,” said Burl East, whose Altegris/AACA Opportunistic Real Estate fund is the top-performing real estate fund this year and over the last three and five years, according to Morningstar data.

While retail, restaurant and hotel REITS are unlikely anytime soon to regain their values prior to the coronavirus pandemic, the slowing rate of infections in New York and other hot spots, along with the benefits of the stimulus package passed by Congress, should limit further broad declines for the industry, he said.

As a result, he is increasing his exposure to select cell phone towers, industrial warehouses and cold storage REITs that have outperformed during the recent market declines. But he said he continues to avoid hotels and malls that will likely continue to face economic pain.

“We’re leaning into this and buying here but we don’t want to go out and buy the junky stocks that have fallen the furthest,” he said.

A broad rally in the U.S. stock market early on Tuesday helped push mall-owner Simon Property Group (NYSE:) up more than 12% on Tuesday, while residential mortgage REITs such as Invesco Mortgage Capital and MFA Financial gained more than 37% and 11% respectively. Even so, all three companies are down more than 80% for the year to date.

Michael Underhill, chief investment officer at Capital Innovations, is bullish on single-family homes and apartment buildings because the slowdown will likely reduce the typical churn of tenants. At the same time, he is moving more of his portfolio away from regions like Houston, which is likely to see a severe economic hit from both the measures to slow the pandemic and the steep decline in oil and gas prices, he said.

“There are some dangerous REITS and there are some resilient REITS and we’re not taking a chance on the dangerous ones,” Underhill said.

Overall, 80 to 95 percent of apartment landlords are receiving their full April rent, according to Scott Crowe, chief investment officer at CenterSquare, an asset manager that invests in both public and private real estate. Between 20 and 50 percent of retailers, meanwhile, are paying their full April rent, with mall-based retailers the least likely to be able to pay in full, he said.

Crowe is skeptical that REIT values will recover any time soon and remains focused on segments such as cell phone towers and industrial warehouses.

“You’re seeing some stocks get a nice technical bounce right now, but we aren’t playing the stock market,” he said.

Consumers are likely to remain skeptical of spending time in enclosed spaces even after the economy reopens, which will put a cloud over hotels, restaurants and movie theaters and keep a lid on job growth for the next several years, Crowe said. Overall, CenterSquare estimates about 25% of all square footage devoted to retail or hospitality will not reopen following the coronavirus-mandated closures.

“People are guessing about a recovery but I think we will have a very tough recession and it’s not like we’re going back right away to how the world looked in February,” when the S&P 500 hit record highs, he said.

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Walmart hit with wrongful-death lawsuit by estate of worker who died of coronavirus

The estate of a Walmart worker who died of coronavirus is suing the retailer, alleging it failed to provide workers with protective masks and gloves, failed to suitably disinfect the store and failed to be straight up with workers about the risks they faced.

Wando Evans, a 51-year-old man who was a Walmart

associate for 15 years, died March 25 as a result of COVID-19, the disease caused by the novel coronavirus.

Four days later, another co-worker at the Evergreen Park, Ill. store died from complications about the virus. In a wrongful death lawsuit filed Monday, Evans’ estate alleges that the blame lies with Walmart.

Walmart management didn’t warn Evans and others “that various individuals were experiencing symptoms at the store and may have been infected by COVID-19 which was present and active within in the store,” the lawsuit said.

Evans was healthy man, according to his estate’s attorney, Tony Kalogerakos of Lincolnwood, Il. The deaths could have been “avoided if [management] was more transparent with teammates and customers,” Kalogerakos told MarketWatch.

The lawsuit, seeking unspecified damages, was filed in Circuit Court of Cook County.

Walmart said it was taking the allegations seriously.

“We are heartbroken at the passing of two associates at our Evergreen Park store and we are mourning along with their families. While neither associate had been at the store in more than a week, we took action to reinforce our cleaning and sanitizing measures, which include a deep-cleaning of key areas,” Randy Hargrove, a Walmart spokesman, said in a statement.

The store then passed a third-party safety assessment, but Walmart also used an outside company to give an extra cleaning to high-traffic areas in the store, Hargrove said.

On March 31, Walmart said it would start taking workers’ temperatures as a precaution and will be getting masks and gloves for staff.

Walmart is planning to hire another 150,000 workers to keep up with demand. But the lawsuit from Evans’ estate alleges the retailer quickly hired new employees over the phone or through other “remote means” without checking if new workers might have COVID-19.

The massive retailer has been adding extra cleaning steps, installing sneeze guards at registers, limiting the amount of customers in a store at any one time and putting decals on the floor to remind shoppers about social distancing rules, Hargrove said.

There were 12,262 confirmed cases in Illinois and 307 deaths as of Monday, according to numbers from the state’s health authorities. There were 356,942 confirmed cases and 10,524 deaths in the U.S. as of Monday evening, according to data aggregated by Johns Hopkins University.

Walmart shares are up 6% from the start of the year. The Dow Jones Industrial Average

is down more than 20% in that same time, while the S&P 500

is down 17.5%.

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