I took this picture from my hotel room on Wednesday just before I headed to the airport:
(View from Brad’s Hotel Room)
And that photo wasn’t taken at sunset. That was taken around 1 p.m. in the afternoon.
Thanks to the migrating smoke from the Canadian forest fires, New York City was ranked number one as the city with the worst air pollution in the entire world on Wednesday.
Thankfully it’s dropped a couple notches and is no longer in the top ten as of today.
And as luck would have it, all my business dealings were finished just before the ominous clouds rolled in.
I was in town for REITWeek 2023, a real estate investment trust (REIT) conference in New York City.
(Brad at REITweek 2023 in New York City)
Today, I want to share some of the takeaways from the trip and my meetings with different REIT CEO’s.
New York is Still Struggling
Now that COVID-19 is in the rearview mirror I’m starting to travel a lot more; meeting with management teams, inspecting real estate, and getting boots-on-the-ground insight into stocks that are worthy of our attention.
While I relished my times in New York City, it’s painful to see how much the pandemic utterly devastated the real estate market. And it has not yet recovered.
Right now, in New York City, office attendance is at about 65% of pre-pandemic levels. Meanwhile, ground-level retailers (who depend on office workers for profits) are struggling to earn a profit.
And that’s only counting the businesses that are still open and did not have to shut down or leave the city altogether.
The number of retail and office vacancies I saw over the course of this past week confirmed the data.
Now, masks are in fashion again as many New Yorkers are being forced back into their homes and offices to avoid the smoke-filled air.
And there was a ripple effect to all of this…
Restaurants shut down, schools closed, airlines delayed flights and cancelled others, and businesses told employees to work from home. Of course, the U.S. economy, especially the New York economy, were impacted.
If there’s one thing that we’ve learned from COVID – and we’re seeing it now with the Canadian forest fires – it’s that certain real estate sectors are critical in good times and bad.
Right now, people’s focus is on safety and security, so their most permanent piece of real estate is their home.
It’s no coincidence that even though REITs are down 0.26% overall as an asset class, residential REITs are up 0.53%, apartment REITs are up 0.68%, and manufactured homes are up 0.89% as of writing this.
This metric is a pretty good indicator of investor sentiment based on recent events. After all, Wall Street is based in New York City, which is the hub for most publicly-traded REITs.
It’s painful to witness, but much of New York is still struggling and hasn’t had a chance to get back on its feet. Some, on the other hand, are shifting toward success.
What I Uncovered at REITWeek
Regardless of the smoke-covered skyline, I uncovered two key insights during REITweek: The hotel sector is not yet on the road to recovery… but there is hope for the office sector, and specifically the life science category.
The CEO of Park Hotels & Resorts (PK) broke the news at the conference this week that they were returning the keys to the lender for two of their previously most lucrative San Francisco hotels.
Based on current numbers of people traveling to San Francisco, business models were “extending the recovery [of the city] by 4 to 5 years.”
Not something you want to hear from the owner of the largest hotel REIT in the U.S. But clearly he made the right decision, as the move better positions the hotel REIT moving forward. The hotel sector has still not recovered to pre-pandemic levels, and every property needs to earn its keep.
Secondly, like the hotel sector, the office sector has not been able to reach pre-pandemic levels yet either… but there is some good news.
While at REITWeek, I met with the CEOs of two uniquely-positioned office REITs that are focused on the life science sector.
Although office REITs are down 0.24% today overall, REITs with life science properties are starting to make a comeback.
Unlike traditional office properties, life science buildings are essential to healthcare. They’re spaces for researchers who make the scientific breakthroughs essential to bettering human health, like curing diseases and improving nutrition.
And the employees of life science businesses cannot work from home. There is no way to transport a lab into everyone’s home office.
I sat down with Boston Properties (BXP) CEO, Owen Thomas, and he told me that the company’s total annual revenue from in-service life science clients is “about $226 million or 8% of total revenue of which 70% comes from public companies with equity market values over $1 billion.”
Although they are down year-to-date after the banking crisis, BXP is starting to see a comeback.
Likewise, REIT CEO, John Kilroy, said that his firm, Kilroy Realty (KRC) has been investing in life science properties for years and confidently stated that “every time we come out of recession, we come out stronger.”
KRC has an $8 billion development pipeline that’s either permit ready or at advanced stages of entitlement. This growth trajectory is incredibly encouraging and not seen in office REITs that do not have some portion of their portfolio dedicated to life science. KRC’s earnings (Funds from Operations) was $1.22 per share in the first quarter, the highest quarterly FFO in the company’s history
A Mission Critical Play
Whether it’s a pandemic, forest fire, or natural disaster, our Wide Moat Research team is laser-focused on finding stocks that offer compelling models of repeatability.
While certain real estate sectors are struggling (NYC office and San Francisco hotels), we’ve come across a few very compelling opportunities that offer attractive risk-reward profiles, just like the life science sector I just mentioned.
And I recently put together a video highlighting one of these sectors entitled “Amazon’s secret royalty program.” This sector of the real estate market is invaluable to companies like Amazon. Without it, they wouldn’t be able to function.
This play is pandemic-resistant, smoke-resistant, recession-resistant, and mission critical to the most successful companies in the world.
Don’t miss out on this opportunity. Click here, to learn more.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily