REITs had another good week, adding to the recovery already underway in March. Notably, this rally is occurring beside a ten year treasury yield that is not falling. To me, this indicates an end or at least a lessening of the market’s fixation on the correlation. Fundamentals also seem to be returning to focus with the companies that are struggling being appropriately punished and those succeeding rewarded accordingly.
Hersha Hospitality sold a hotel in NYC at a 20X EBITDA multiple which I would consider overpriced in today’s environment. The gains on sale are likely to be used to buy back shares which are trading at an EV/EBITDA multiple of about 9.3X based on 2017 numbers. This transaction shows the disconnect between the public and private markets and Hersha is taking advantage of the arbitrage.
The average REIT (not market cap weighted) trades at an 11.7% discount to NAV. Those held in 2CHYP trade at a significantly larger discount on average. Many have the opportunity to execute a similar arbitrage to what Hersha is doing and some are already partaking. Sotherly Hotels has bought back about $10mm of its stock which is significant given their $88mm market cap.
I would like to see GNL, GOV and GPT engage in similar buybacks, but unfortunately, it seems unlikely at this point with the growth aspirations of their management teams.
Now that REIT market prices have stabilized a bit, I think M&A activity will pick up. Since 2CHYP consists mostly of small caps trading at discounts to NAV, our stocks are more likely to be the targets of M&A rather than the buyers.
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