August 21, 2023, Jay Hatfield, InfraCap CEO ~ Most investors currently have a negative forecast for the Real Estate (“RE”) Sector and Real Estate Investment Trusts (“REITs”), specifically commercial REITs, however, these investors are usually focused on the value of the common equity of REITs. Let me show you why we think it’s a great time to own preferred equity in REITs and take advantage of market dislocations.
Given uncertainties in commercial REITs, particularly in specific subsegments, some investors may understandably exhibit hesitancy towards common equity investment. Investor hesitancy has spread to the preferred equity units as well, with certain REIT preferreds experiencing unwarranted selloffs. In our view, this presents an opportunity, and as one might say, don’t throw the baby (i.e., REIT preferreds) out with the bathwater.
For example, we believe there is a material difference between a Class A Manhattan office property like One Vanderbilt and one of the many vacant office buildings in downtown San Francisco. While real estate news headlines focus on the latter, we focus on finding opportunities in REITs that have exposure to top-quality properties.
When assessing a REITs quality, it is critical to draw a distinction between a REIT's corporate-level debt and its asset-level debt. In doing so, we believe you can avoid potential pitfalls.
For illustrative purposes, as of March 31, 2023, upon analyzing Vornado's real estate portfolio, which encompasses $10.3 billion of debt, and $1.2 billion of preferred stock; we also find $5.7 billion in mortgage debt secured by underlying buildings. While headline risks associated with the value decline of commercial real estate may be material, in our view, a REIT's ability to strategically divest from distressed assets and debt associated with it is a positive factor when valuing a REIT and may benefit the preferred equity units. Walking away from a distressed property and its attached debt load can benefit preferred stockholders.
This information is not an offer to sell, or solicitation of an offer to buy any investment product, security, or services offered by Jay Hatfield, or Infrastructure Capital Advisors, LLC, (“ICA”) or its affiliates. ICA, will only conduct such solicitation of an offer to buy any investment product or service offered by ICA, if at all, by (1) purported definitive documentation (which will include disclosures relating to investment objective, policies, risk factors, fees, tax implications and relevant qualifications), (2) to qualified participants, if applicable, and (3) only in those jurisdictions where permitted by law. Jay Hatfield or ICA has beneficial long position in securities discussed either through stock ownership, options, or other derivatives; nonetheless, under no circumstances does any article or interview represent a recommendation to buy or sell these securities. This discussion is intended to provide insight into REIT preferred stocks and is not a solicitation of any kind. ICA buys and sells securities on behalf of its fund investors and may do so, before and after any particular article herein is published, with respect to the securities discussed in any article posted. ICA's appraisal of a company (price target) is only one factor that affects its decision whether to buy or sell shares in that company. Other factors might include, but are not limited to, the presence of mandatory limits on individual positions, decisions regarding portfolio exposures, and general market conditions and liquidity needs. As such, there may not always be consistency between the views expressed here and ICA's trading or holdings on behalf of its fund investors. There may be conflicts between the content posted or discussed and the interests of ICA. Please reach out to the ICA for more information. Investors should make their own decisions regarding any investments mentioned, and their prospects based on such investors’ own review of publicly available information and should not rely on the information contained herein. ICA nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. We have not sought, nor have we received, permission from any third-party to include their information in this article. Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or other comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. The information contained herein represents our subjective belief and opinions and should not be construed as investment, tax, legal, or financial advice.