Barry Sternlicht, is a self-made billionaire and the founder of Starwood Capital Group, which is one of the biggest private equity firms in the world, rivaling Blackstone (BX), Apollo Global Management (APO), KKR (KKR), and Brookfield (BAM). He believes that REITs are deeply undervalued.
The reason why he thinks that REITs are so cheap is, of course, because they have crashed by nearly 40% since the beginning of 2022 even as their cash flows kept on rising.
REIT balance sheets are today the strongest they have ever been with LTVs at just 35% on average and long debt maturities. Moreover, interest rates only surged because inflation was hot and this has resulted in significant rent growth across most property sectors.
A lot of individual REITs have dropped by closer to 50% or more and now trade at huge discounts to their net asset values. A good example is Camden Property Trust (CPT), an apartment REIT that Starwood recently added to their portfolio.
Investors like Barry Sternlicht understand that buying good real estate at 60-70 cents on the dollar will likely produce strong returns over the long run and this is why he is now buying REITs.
Another interesting takeaway is that the office market is performing a lot better in some parts of the world. He explains that work-from-home is mostly a U.S. phenomenon and people are back in the office in Europe and Asia. Τhe interesting thing is that office REITs are just as heavily discounted in Germany as in the U.S. For example German office landlords like alstria office REIT and Branicks Group are priced at massive 50-70% discounts to their net asset values, even as their rents keep on growing.
Another reason in favor is that some heavily leveraged REITs could present asymmetric risk-to-reward prospects because lenders don't want to force a bankruptcy. Banks are doing what they can to avoid taking possession of office buildings. Starwood knows this best as they recently returned the keys to some office properties back to their lenders. Lenders are not prepared to manage them so they are trying their best to work out solutions with landlords whenever possible to allow them to get past today's crisis and not force them into bankruptcy situations.
They are, of course, very risky, but they are priced at huge discounts as if they were going through an existential crisis and likely facing bankruptcy. However, the fundamentals of office buildings are actually quite strong in some European and Asian markets, and since lenders don't want to gain possession of these properties, they will likely be flexible with borrowers in the near term in case they breach some covenants.
Therefore, their rock-bottom valuations may not be justified and could lead to enormous upside in the future as we get past this crisis.
(source:SeekingAlpha)
