My wife and I have been down in Islamorada all week, and the trip and the time we spent here actually give a great deal of insight into the real estate markets.
As we came down the turnpike form Orlando, about the time we got to the exits for Fort Lauderdale, we started seeing signs of construction and development projects and that continued nonstop until we got past Miami. We detoured through the western edge of Miami due to an accident at the very last exit on the turnpike and we saw a lot of for-sale signs and several new housing developments in various stages of construction. We are just entering the mid-recovery phase of the South Florida boom/bust cycle, and the anecdotal observation is that the residential and commercial real estate markets are not spectacular but are in pretty good shape.
Once you get into the Keys, you still see a fair amount of for-sale sign and foreclosure auction notices, but not like we saw on the last few trips down here. There is plenty of inventory and prices are still pretty reasonable for the near side of paradise, and there are a couple of commercial projects under way for the first time in years.
I have not been a raging bull on real estate and I am still not. I am long-term very bullish, but I think it will be a longer process than many expect to see. It will not be a V-bottom with sharp annual gains, as right now we still have reluctant first-time buyers putting brakes on overall home sales, and businesses have been reluctant to spend on new commercial projects. That will change slowly and the market should gradually improve over time unless we get a geopolitical shock or QE ends worse than the Fed expects.
My major holding is in small banks, so I would keep up on real estate just for that reason, but my second-largest asset class is easily real estate related securities. REITs and real estate operating companies have been very good to me over the years, and I expect that to continue as we can still find bargain issues worth holding to take advantage of the long-term recovery in both residential and commercial real estate markets.
The multifamily markets have been hot the past couple of years, but only the larger-cap REITs have benefited from the trend. Preferred Apartment Communities (APTS) has a market cap of just $232 million and the shares have been pretty much ignored by institutions. The stock has done well for me, but still trades at less than 80% of book value. At year end, it owned 10 multifamily communities with a total of 3,326 units in seven states, and 10 grocery-anchored necessity retail shopping centers with a total of approximately 694,000 square feet of gross leasable area in five states.
APTS also holds 15 real estate loans that include purchase options for the underlying properties. Twenty percent of the portfolio can be in other real estate and Preferred Apartments has focused on grocery store-anchored strip malls. I like that segment of the market almost as much as multifamily, so I am pleased with the diversification of the property portfolio. You get paid well to own this REIT, as the shares yield 6.61% at the current price.
BRT Realty (BRT) is another multifamily REIT that Wall Street has largely ignored. The company has undergone a multiyear transformation from a finance REIT to an equity owner of multifamily properties. BRT owns 28 multifamily properties with an aggregate of 7,885 units around the U.S. It is also partners in a joint venture that is developing large multiuse projects in Newark, N.J. The stock is trading at just 83% of book value. The REIT does not currently pay a dividend, but as the multifamily units generate cash and the New Jersey joint venture continues to progress, tax laws will eventually force them to resume a payout and that will be a catalyst for the share price at some point in the (let's hope) not-too-distant future.
There are still a lot of bargains in smaller REITs and real estate companies. We are starting to see strong buying from activists and insiders alike. A firming of collateral values is making the lending REITs in both residential and commercial lenders more attractive. Over the next week, we will spend some time looking at real estate-related opportunities.
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