Trade Alert 2024-09-09
We talked about closing this position out a few times.
Shares had crossed into our overvalued territory.
We raised targets during the sector update, but shares continued to climb and broke through that level also.
I was more hesitant to take the gains on our position due to the taxable status of the accounts.
However, it was long-term capital gains, which is much cheaper than short-term capital gains.
Trades Placed
I placed two trades here. The first was closing out our position in AvalonBay Communities (AVB) and the second was using that cash to purchase additional shares of Rexford (REXR).
- Sold 132 shares of AVB at $225.46.
- Purchased 596 shares of REXR at $49.8999.
The two trades have a very similar total dollar amount, so this is replacing AVB with more shares of REXR.
Commentary
We opened the positions in AvalonBay Communities during the pandemic.
You might remember how many investors during that time were claiming that apartment REITs were completely uninvestable.
Due to higher vacancy rates, non-paying tenants who legally could not be evicted, and BLM events occurring in downtown areas, the investors claimed that apartment REITs (and thereby apartment buildings) were trash.
Obviously, the apartment REITs did quite well since then.
We entered our positions in AVB on 6/15/2020 and 10/28/2020.
Both of those occurred prior to the vaccine announcements.
I posted some pretty harsh criticism of the “apartment buildings are trash” viewpoints.
In a single massive “down” day the apartment REIT prices could fall by more than a year of revenue.
Cumulative, apartment REIT valuations had declined by several times gross revenue.
Of course, the market eventually decided that apartment REITs were not actually trash.
The hardest part about closing this position for me is mental. It’s something that shouldn’t matter.
Having those shares listed in our open positions simply looked great.
I want members to see that we were making the call to buy those apartment REITs when so many investors were in an absolute panic.
Members won’t notice the closed positions as much as the open positions. Regardless, I think this trade makes sense on valuation.
To be clear, there is nothing fundamentally wrong with AVB. We didn't stop liking it. We did stop liking the price.
Charts
This chart shows how many shares of REXR someone could buy for the price of a single share of AVB:
According to this chart, we had some pretty good purchases.
I should point out that nailing these charts perfectly involves a great deal of luck in addition to skill. Skill can help you make a favorable trade. Luck is getting you the best exchange ratio.
Relative to those dates, both of these shares are up substantially. However, AVB increased much more than REXR.
In share price alone:
Relative to 6/15/2020, AVB is up 40.3% and REXR is up 19.6%.
Relative to 10/28/2020, AVB is up 69.9% and REXR is up 6.0%.
If we factored in the higher yield on AVB, the outperformance would be even wider.
Did I get the perfect time for this swap?
Clearly not. Right at the end of June there was a slightly more favorable ratio.
However, we’re recording huge returns for the position.
Quite frankly, AVB outperformed my expectations. The fundamental performance was good, but the share price performance was even more surprising to me.
Why is AVB ripping higher?
Well, all the apartment REITs are soaring.
New supply should be high in 2025, but lower relative to 2024.
In 2026, it should fall substantially from 2025 levels.
In 2027, most likely it will be around the 2026 levels.
Consequently, landlords will have more bargaining power as renters will be trapped once again.
Lower Interest Rates
We’ve seen a sharp decrease in interest rates. That’s been very favorable for equity REIT valuations. The technicals still point to interest rates continuing to fall.
Unless the Federal Reserve surprises the market in a bad way, we could see rates fall further.
Source: MBSLive
The 2-year Treasury rate has fallen substantially. In June it was still over 4.7%. It fell by over 100 basis points in less than 3 months. That’s a big swing and it’s very favorable for equity REIT valuations.
We’re also seeing that the current rates are well below the moving averages. That’s another favorable sign as we see a clear trend in place. The Federal Reserve could try to stop the trend, or they could reinforce it.
The 10-year Treasury rate has been falling also:
Source: MBSLive
That’s great for financing. For REITs that want to buy real estate, it is much easier to issue new 5-year to 20-year debt than it was a few months ago.
Some still may hold off a bit as they look for rates to fall even further.
Open Positions
Closed Positions
Execution
Below is the screenshot from my Schwab account:
Disclosure: Long the positions shown in my portfolio.
Member discussion