Summary

• Micro-cap UK REIT M&A target with all-share offer that implies ~6% return vs. the current share price and a potential 8% - 12% annualized return over 6 - 9 months.

• At £0.72 per share, trades at a ~6% discount to current implied value of all-share offer, ~14% discount to NAV based on third-party property valuations, and an 8% implied net initial yield.

• AEW UK REIT have made the all-share offer. AEW floated a potential offer at a higher price (3% discount to NAV; current offer is 6% discount) earlier in the year but decided not to proceed. AEW used to manage AIRE.

• Key wrinkle is largest shareholder, Glenstone Property, who owns ~25% of the REIT, made an all-cash offer at £0.70 per share following AEW UK REIT’s decision not to proceed.

  • However they have gotten basically zero other shareholder to support their bid.

  • They had supported the initial AEW UK REIT proposal but have done a 180 and no longer support an all-share offer from AEW.

  • They could block a merger with their 25% interest if they vote against a deal.

• While not certain, I think that AEW / AIRE add an all-cash component (AEW UK REIT could fund a 25% cash consideration with debt and stay below their targets) or find other sweeteners to get Glenstone on board and a deal represents the best of a bad set of options for Glenstone.

• AEW UK REIT have to make a firm bid by August 28th and Glenstone’s offer lasts through September 4th representing near-term catalysts.

Background

Alternative Income REIT is a very small UK REIT focused on long-leased property. The market cap is about £55m and it’s fairly illiquid - recently (over the past couple weeks) trading only £10k - £30k per day although there have been periods of greater liquidity in the stock. The average daily traded volume is ~£150k.

It owns a £103m portfolio (based on third-party valuation) of 19 predominantly long-leased properties with inflation-linked rents. The portfolios is pretty granular with smaller lot sizes diversified across property types and geographies. Industrial is the largest segment with approximately a quarter of market value and Healthcare (specifically care homes) close behind representing just under 20%. As of June 2026, the WALT was 15 years and 82% of leases are inflation-linked. The valuation net initial yield was 7.3%.

The REIT IPO’d as AEW UK Long Lease REIT PLC in 2017 raising £80.5m at £1.00 per share managed by AEW. After investing the IPO proceeds, the REIT ran into tenant trouble in 2019 when Meridian Metal Trading - their largest tenant by rent - fell into administration. They were able to sign a new 8-year lease on unchanged terms with the group that acquired the business (more on this later) but this - along with weak performance since IPO and a failure to scale the REIT - led the Board to announce a strategic review and serve a termination notice on AEW as manager.

The strategic review concluded with no bid or merger proposal that reflected the Board’s view of value and they opted to continue the existing strategy under a new investment manager - M7 real estate - in 2020 and rebrand to Alternative Income REIT. Following the sale of M7 real estate to Oxford Properties, founder of M7 Richard Croft retained the AIRE management contract in the new real estate investment management firm he launched in 2024, Martley Capital, who manage the REIT today.

AIRE refinanced their debt facilities with HSBC in October 2025 with a 5-year facility comprised of a fixed-rate term loan and revolving credit facility with a weighted average interest rate of 5.6% - a significant step up over the 3.2% fixed rate on the previous in-place debt. This led them to cut the target dividend by 10% from £0.062 in 2025 to £0.056 for 2026, which has also weighed on the share price.

Takeover offers

In the chaos of COVID, the strategic review, and change of investment manager, Glenstone REIT PLC built a ~15% interest in the REIT through a tender offer in 2020. They priced their tender offer at £0.59 per share - a ~15% premium to the prevailing share price but ~30% discount to NAV of £0.84 per share.

They subsequently increased their interest in the REIT to 24% over the course of 2021 through open market purchases when the REIT traded roughly between £0.60 and £0.70 per share, making them the REIT’s largest shareholder. Adam C Smith, a director of Glenstone and a member of its investment committee, also owns ~2.5% of the company and joined the Board in 2021.

Fast forward to March 2026. AIRE announced the receipt of a non-binding, all-share acquisition proposal from AEW UK REIT (a separate, small cap UK REIT that AEW manage) at a 3% discount to AIRE’s net asset value. They had until April 21st to make a firm offer for the company, which they failed to do.

In May 2026, Glenstone announced they were contemplating an all-cash offer for the company. Following AEW UK REIT’s failure to make a firm bid for the company they expressed that AIRE consider a managed wind down or outright sale of the company. After not receiving a constructive response, they decided to bid for the shares that they do not own themself. At the time they indicated that they would pursue a managed wind-down of most of the portfolio and potentially retain some of the assets themselves.

They ultimately made a firm cash offer at £0.70 per share in June 2026 before bumping it up to a final offer of £0.714 in July 2026 (however, this price “increase” included the £0.014 per share dividend announced by AIRE so did not result in higher proceeds to shareholders). In conjunction with Glenstone’s final offer, Adam Smith resigned from the Board. In a response to Glenstone’s offer, AIRE revealed that they had informally approached the company with a £0.665 per share acquisition offer in November 2025, a ~20% discount to NAV and ~10% discount to the prevailing share price.

Glenstone’s offer, which has reverted to £0.70 per share now that the interim dividend has been paid, is unconditional through September 4, 2026. They have been buying shares in the open market at their offer price but effectively no shareholders have accepted the offer other than Glenstone and Adam Smith. As of August 18, 2026, 22.35m shares / 27.8% of those outstanding have been accepted, of which 20.44m shares are owned by Glenstone, 1.9m by Adam Smith, and just ~18,000 shares / 0.025% by third-party shareholders.

Current situation

A key reason for why shareholders have frowned on Glenstone’s offer is what makes this situation interesting. AEW UK REIT returned to the party in July 2026 with a revised all-share offer in which AIRE shareholders would receive 0.725 AEW UK REIT shares, which was based on a 6% discount to AIRE’s net asset value (compared to the 3% discount incorporated as part of their first non-binding offer). This implied value of £0.77 per share based on AEW UK REIT’s share price at the time, a 10% premium to the Glenstone offer.

The AIRE Board announced that they welcomed the possible offer from AEW UK REIT and recommended that AIRE shareholders do not accept the Glenstone offer. They noted that Glenstone had supported the original AEW UK REIT proposal in principal. AEW UK REIT have until August 28th to either announce a firm offer for AIRE or withdraw their interest.

Glenstone have done an about face on their support for a potential AEW UK REIT offer earlier in the year stating in a July 2026 response that they would not be supportive of any future offer for AIRE by AEW UK REIT. They specifically highlighted that they were taking a more cautious approach when considering whether they wanted to become AEW UK REIT’s single largest shareholder.

This is critical as Glenstone, with their >25% shareholding effectively have a blocking interest. Even if AEW UK REIT makes a firm offer and it is recommended by the AIRE board, under a UK scheme of arrangement, at least 75% of the shares voted have to be in favor for it to be approved.

This creates a stand-off dynamic in which Glenstone are well short of the 50% acceptance level required to make their takeover off unconditional and AEW UK REIT would need Glenstone to vote for (or abstain) an all-share offer, if they are to make one.

Scenarios and potential outcomes

I think it’s in AEW UK REIT’s interest to acquire AIRE. Any deal will be accretive to EPRA earnings, even if agreed at AIRE NAV (initial proposal was at a 3% discount and current is at a 6% discount) and before synergies from eliminating duplicative public company costs and board compensation. If agreed at a discount to NAV, it will be NAV accretive as well. Based on the current exchange ratio, the deal will increase NAV per share by 1.6% and EPRA earnings per share by 3.2%, which could rise to >7% once administrative costs are eliminated (but maintaining current investment management fee levels).

Acquiring AIRE will also improve their property portfolio metrics by increasing occupancy and WALT, which were 90.6% and 5.7 years for AEW UK REIT at March 2026 vs. 100% occupancy and a 15.0 year WALT for AIRE at June 2026. Both portfolios are higher-yielding (with valuation net initial yields of 7.7% for AEW UK REIT and 7.3% for AIRE respectively), granular with small lot sizes, and largely secondary in quality (both location and asset quality).

They’re also very familiar with the AIRE assets given that members of the AEW UK REIT management team also used to manage the REIT in previous form and that they just carried out due diligence on the portfolio as part of their bid earlier this year. Obviously things could change going forward but I can’t see a situation where they’d make a second bid that they’re not interested in closing on.

I think the AIRE Board will support a transaction with AEW UK REIT as a clean way to gracefully exit overseeing this REIT with limited growth prospects. The Board is comprised of independent directors following the resignation of Adam Smith, Glenstone’s representative: Simon Bennett (Chairman) and Stephanie Eastment. Ms. Eastment joined the Board in 2021, is 66, and already sits on the Board of two other investment trusts and another company. Mr. Bennett joined the Board in 2022, is 68, and has held multiple past directorships and Chairman positions. I don’t think he’ll struggle to find another director position, especially with if he successfully oversees this merger, which will give him a shareholder-friendly reputation.

The big question is whether - and how - AEW & AIRE can get Glenstone and their 25% interest to play ball. And if not, what Glenstone’s best outcome will be given their failure to secure effectively any third-party acceptances for their £0.70 per share all-cash bid.

As of August 11th, Glenstone own 20.44m AIRE shares with a cost basis of ~£0.65 per share. This represents ~£13.3m at cost, ~£14.7m at current prices, and ~£15.7 at the price implied by AEW’s all-share offer. This is approximately 10% of Glenstone’s asset base.

I think there is a decent chance that Glenstone’s statement opposing the transaction is a bluff and that they would ultimately accept this offer if unchanged. This gives them the opportunity to contribute their AIRE ownership into a larger, more liquid entity (AEW UK REIT currently trades approximate 2x AIRE in volume) - albeit they’d still be left with an outsized shareholding in the REIT. Their ~25% interest in AIRE would represent a 6.8% interest in the combined AEW / AIRE entity.

I think there is a good chance that AEW UK REIT adds a cash component to the transaction as a sweetener to make it more palatable to Glenstone and reduce the amount of equity that they roll into the new entity. Importantly, AEW UK REIT has proposed an amendment to their investment policy in their AGM scheduled for September 9th to increase their maximum leverage from 25% to a range of 30% - 35%. Pro forma LTV for the combined entity would be just over 30%, which would allow them to fund ~£14.9m of cash assuming a 35% LTV on AEW / AIRE’s most recent portfolio valuations. This would represent a 25% cash / 75% share deal and would allow Glenstone to reduce their interest in the combined entity to just over 5%. Furthermore, AEW UK REITs existing £60m loan facility expires in July 2027 so they were going to have to refinance anyway and at a higher rate (their current debt is at a ~3.0% fixed rate).

The downside case is that Glenstone block a transaction. In this case I think their options are to either make another bid for the company at a higher price (with £0.77 per share the benchmark set by AEW UK REITs bid), which they are able to do if a third-party firm offer for the company is made, or push management to implement a managed wind-down of the portfolio and liquidate the REIT. In the short-term the share price certainly falls if a potential transaction is blocked and no competing bid is made as there would be significant uncertainty around the timeline and ultimate pricing for assets.

As a way to handicap the potential near-term downside, AIRE traded at ~£0.75 before AEW UK REITs first offer for the company in March and had traded up to £0.79 per share before they pulled their bid. The share price fell to £0.74 the next day (-6%) and traded down to a low of £0.67 (-15%) by mid-June - after Glenstone had announced a possible bid for the company but before they had finalized a price.

The longer-term impact would be based on what price can ultimately be achieved through the liquidation. AIRE have sold three properties since 2021, all of which have been sold at a premium to their valuation market values.

Their valuers have cumulatively written down property values by ~10% since June 2021 and ~3% since June 2020. This is a rough estimate - looking at change in valuation during each year compared to the starting investment property value and doesn’t adjust for acquisitions and disposals so is not like-for-like or precise. However, it does indicate that at least some of the challenges to long-leased real estate posed by higher interest rates have been incorporated into valuations.

These two data points indicate that at a minimum, there is some liquidity for AIRE’s smaller, more granular assets and their third-party valuations are not crazy. That being said, the pricing achieved in a full liquidation will be different - and lower - than three select asset sales over the past 5 years. The current share price implies an unlevered property-level discount of ~9% vs. the most recent valuation.

Potential returns

Due at least in part to these dynamics, AIRE trades at a healthy spread to the AEW implied offer price. Based on AEW UK REIT’s recent trading price, their offer implies £0.76 per AIRE share, which is 5.9% higher than AIRE’s share price of £0.72.

AIRE trades at a ~14% discount to NAV (based on third-party valuations) and a ~9% unlevered discount to portfolio value. At £1.052 per share AEW UK REIT trades at a ~3% discount to their NAV of £1.084 per share.

Assuming a 6 - 9 months timeframe to complete a scheme of arrangement, that the final pricing is unchanged (whether or not a cash component is offered), and the current AEW UK REIT share price, this would result in annualized returns of 8% - 12%.

AEW UK REIT has actually traded pretty tightly to their NAV over the past 12 months with the steepest discount to NAV being less than 10% in April 2026. This compares favorably to other small cap UK REIT peers, many of which have traded at 20% - 35% discounts - or greater. One factor is likely their high dividend yield, which is ~8%. This dividend is paid in cash (with no scrip component) and covered by EPRA earnings.

Looking at a range of hold periods and discounts to NAV for AEW UK REIT, the discount would have to exceed the largest seen in the past 12 months to result in a loss and the timeline to close would have to exceed 12 months at a 5% NAV discount for returns to fall below those of cash.

These returns do not assume that AIRE pays any additional dividends. Their target dividend of £0.056 per share - also fully covered by EPRA earnings - equates to a 7.8% yield. This dividend (or retained cash flow if not paid out) would lessen the blow if the timeline were to drag out or deal falls through

AIRE portfolio highlights

The Alternative Income REIT is fairly diversified. The largest property type is Industrial at just over a quarter of value with Healthcare (three care homes) representing ~15% of value. Just under 50% of the portfolio is in the Midlands and North West / Merseyside with a quarter in London and the rest of the South East.

The biggest upcoming portfolio issue is their two assets leased to Meridian Metals located in Dudley, near Birmingham and Sheffield. These leases expire in May 2027 and in a July 9th 2026 property update they confirmed that the tenant has commenced a process to wind up its business. The leases benefit from a parent guarantee from Duferco International Trading Holding S.A., which is a strong covenant and as a result the tenant is expected to pay all rent and dilapidations required through the end of the lease term. The impact on the portfolio will come in the 2nd half of 2027 as the properties will need to be re-leased.

These two assets comprising three buildings were valued at £10.15m as of December 2025, which represents £60 PSF and a 7.4% NIY. This is virtually unchanged from their acquisition price in 2017. Management has indicated they have been valued on the assumption that in-place leases would not be renewed and that current rents are below market. In-place rents are £4.75 PSF in Dudley and £4.55 PSF in Sheffield and comparables I found for properties in the same business parks are around £5.75 PSF, which supports the potential for higher rents when re-leased.

To provide a couple data points on the near-term value downside, in-place rent of £799k represents ~10% of AIRE’s rent roll and is equivalent to £0.01 per share, which would reduce EPRA earnings by ~15% if the leases expire with no new tenants identified. When Meridian Metals went under the first time around in 2019, valuers wrote down these assets’ value down from £10.75m to £6.8 million vacant possession value, which represents £40 PSF. Adopting this value would reduce the portfolio value by £3.35m or ~3%.

AIRE own two other properties valued in excess of £10m.

Pocket Nook Industrial Estate in St. Helens (between Liverpool and Manchester) was valued at £11.85m at December 2025, representing £175 PSF and a 6% NIY based on ~£760k of rental income. This property comprises three industrial units, a small office with a yard (leased to the UK government as a car license testing center), and storage area. The property is leased to Biffa Waste Management, the UK government, and BGEN, and engineering firm. The WALT is very long due to 100+ year leases to Biffa - 52 years. The site is 16.1 acres. In terms of upcoming expiries, one lease with BGEN expires in 2027 (~20% of property rent) with another to the same tenant expiring in 2030 (~10% of rent).

Bramall Court is a residential building comprising 115 flats leased to Mears Group Limited through 2041 (15yr WALT) as social housing. In-place rent is £840k with annual rent uplifts linked to CPI with no cap and a 1% collar. Mears Group is publicly listed and a strong credit. Furthermore the rent is underpinned by a £1.0 million per year contract Mears Group have signed with the Salford City Council to manage the property, which helps cover the rent and overhead. This contract is for 15 years - through 2038 - with a break option in year 10 (2033).

The property is valued at £10.85m, representing £95k per unit (mix of 1 to 3 bedrooms; equates to £115 PSF) and a 7.2% net initial yield. The property was operated as student accommodation until 2021 when Mears invested £2m to refurbish the asset and convert it from shared student accommodation to flats.

Collectively these four assets are valued at ~£33m, or ~1/3 of the portfolio market value. These are not prime assets and their valuation yields reflect it. However, between these larger assets and scanning through the smaller assets in their portfolio, I don’t see any major issues. I do think their Meridian Industrial units going from a potential renewal to confirmed re-letting affecting 10% of rent - despite being already reflected in the third-party valuation - will represent a key area of diligence for a potential buyer. Positively, AEW UK REIT announced their bid after the July 9th property update so this was not new news.

Key risks

The worst case scenario is if Glenstone get >50% but <90% acceptances for their all-cash offer, which gives them effective control but does not require them to buy out minorities. They could move the listing to the illiquid Jersey exchange where their REIT is listed and the combination of a controlling shareholder with their own interests and illiquidity would be very bad for the share price. I think this is very unlikely given effectively no independent shareholders have accepted it to-date (35 days after it’s been made).

AEW UK REIT do not make a firm offer or Glenstone block a transaction. In this case you’re looking at a near-term decline in the share price for sure and uncertainty around the go-forward strategy and timeline. I think if this happens, the Board most likely proposes a managed wind-down of the company and you’re looking at a probably 2 year process and ending value somewhere between a 15% discount and 5% discount to NAV once transaction costs, etc. are taken into account. Call it between £0.70 and £0.80 per share.

The potential all-share transaction goes ahead but the AEW UK REIT share price declines, which lowers the implied price and reduces the spread. This could happen leading up to a transaction or immediately afterwards if Glenstone start selling their shares aggressively post-close and there’s no lock up. Positively, the AEW UK REIT has responded positively to the potential deal. I would definitely be disciplined to sell here either after a firm offer is announced and the spread closes or immediately after closing.

Source: ILPT May 2026 Investor Presentation

Industrial Logistics Property Trust owns industrial and logistics properties in the US. The portfolio on the mainland is fine - predominantly triple net leased big boxes, 42.9m sq ft, 98% leased, with a 4.2 year WALT.

What makes it interesting are the crown jewels: a 226 property portfolio in Hawaii that represents 28% of annualize rental revenues. A large share of this portfolio is ground leases (common in Hawaii), which provides enhanced credit protection as tenants that don’t renew must hand over the structures they’ve built at their own expense. Barriers to new industrial supply in Hawaii are extremely high due to availability of well-located industrial land, the share of land preserved for conservation, a very high regulatory burden, and high construction costs.

Source: ILPT May 2026 Investor Presentation

Outside of ground leases - the majority of which are in Hawaii - the portfolio is focused on warehouse and distribution properties with light manufacturing representing just 7% of of revenues. Fedex is the largest tenant by far, mostly by virtue of ILPT’s ill-fated acquisition of Monmouth Real Estate Investment Corporation in 2021 (more on this later).

Source: ILPT May 2026 Investor Presentation

The portfolio has been performing well. Cash basis NOI grew ~4% year on year in Q1 2026, supported by strong occupancy that’s remained above 94% over the past 5 quarters and health spreads on robust leasing activity.

Source: ILPT May 2026 Investor Presentation

Why this opportunity exists

ILPT is externally managed by the RMR group ($RMR). They are one of the best-known, worst-actors in the REIT space. The management contract is for a 20-year term that automatically renews annually. Their management fee is charged on the lower of invested capital and market capitalization, both on a total basis including debt. As a result, they are incentivized primarily to grow the vehicle with the value on a per share basis a secondary concern.

They do earn an incentive fee that is based on outperformance on a per share basis compared to the MSCI U.S. REIT/Industrial REIT index over a 3yr period but after the share price collapsed during the interest rate shock of 2022 (more on this later), this has reset and they’ve started earning incentive fees again in 2025 despite the share price being down ~65% over the past 5 years.

Any RMR-managed vehicle will trade at a discount. One way of expressing this discount is based on the termination fee that would be payable if the management contract was cancelled. For ILPT, I calculate this would be on the order of $300m vs. the equity market capitalization of $600m and enterprise value of $4.2 billion. At my NAV estimate, which I will get into later, this is around a 35% warranted discount to NAV.

Beyond the RMR “stink”, their approach to capital allocation based on their management fee incentives is precisely what got them into the current situation. In late 2021 they agreed to acquire another public US industrial REIT, Monmouth Real Estate Investment Corporation. They were the winner of a bidding war for the REIT and paid peak industrial real estate prices. The acquisition was largely funded by relatively short-term (3yr with 2x 1 year extensions) floating rate debt issued when rates were low.

The lollapalooza effect of an acquisition at peak pricing, using short-term, floating rate debt at trough rates came home to roost almost immediately. Leverage went from <5x net debt to EBITDA and >4x EBITDA interest coverage to >13x net debt / EBITDA and ~1x interest coverage. The CMBS debt structure limited their ability to sell assets to delever and the company had to utilize capital to buy in-the-money interest rate caps to stay on top of interest expenses. In 2023 is was unclear whether the entity would be able survive without issuing highly dilutive equity and they cut the dividend to a nominal quarterly level of $0.01 per share.

Why now?

So why is ILPT interesting today with the share price up ~150% in the past year despite it remaining externally managed by RMR and leverage remaining elevated at 11.6x net debt / EBITDA and 1.4x EBITDA interest coverage?

They have termed out the floating-rate debt that funded the Monmouth acquisition on a 5-year basis, fixed-rate basis, interest-only basis. This has been done in two transactions - a $1.16bn financing in 2025 at 6.4% rate secured by wholly-owned assets and a $1.62bn financing for their Mountain Joint Venture (ILPT own ~67%) at 5.7% rate in May, 2026. This limits maturity risk as they have no consolidated maturities until 2029 (and this is their lowest-leverage pool supported by some of their best assets in Hawaii). They do have $190m of maturities in their unconsolidated jointe venture (ILPT own ~22%) secured by US mainland properties but this JV has a healthy debt yield of ~11% (compared to 7% - 8% for the wholly-owned and Mountain JV portfolios), which supports refinancing. These transactions also mitigate interest rate risk along with the capital needed to purchase rate caps, which has been material over the last couple of years.

As a result, while ILPT’s leverage remains elevated (and will rightfully put off many investors), much of the risk around it has been reduced significantly.

These refinancing transactions improve the predictability of earnings and cash flows, which led to the company reinstating annual FFO guidance in Q1 2026 and ultimately, provides visibility into normalization of the dividend. Management provided normalized FFO guidance of $0.32 per share for Q2 2026 and $1.305 per share for 2026. This is primarily based on ~2.8% year-on-year NOI growth at the midpoint, a deceleration from 4.1% in Q1 2026 and the May 2026 refinancing terms.

ILPT currently pays a dividend of at a rate of $0.20 per year. This represents a <20% payout ratio based on normalized FFO and ~30% of rolling four-quarter cash available for distribution (a metric similar to AFFO). A low payout ratio has allowed them to retain significant amounts of capital, much of which was required to fund interest rate caps and be held in reserve to address refinancing needs. This is no longer necessary.

ILPT has addressed their two largest vacancies within the portfolio ahead of schedule, setting them up to achieve the high-end (or beat) their 2026 guidance range and carry growth into 2027. Just recently (in June 2026) they announced a lease to Fedex for a 10-year lease term for a ~530k sq ft vacant property in Indianapolis, which commenced on May 1, 2026 and had been vacant since August 2024 along with a long-term (53-year) ground lease for 2.2m sq ft in Kapolei, Hawaii commencing on July 1, 2026. Their 2026 guidance had assumed the Indianapolis property would be leased in June (so was achieved 1 month ahead of schedule) and the Hawaii property remained vacant for the balance of the year.

They did not announce financial terms in the press release but we can estimate the impact. CBRE estimates that market rents for Indianapolis warehouse / distribution properties of ~500k sq ft in this submarket are $5.75 - $6.25 PSF on a triple-net basis. If we assume $5.50 PSF, that results in net rent of $2.9m or $0.044 on FFO on an annual basis. At REITWeek 2026 Management indicated that the previous rent at the Kapolei, Hawaii property was equivalent to $0.03 per share of FFO.

Putting this together with the timing of the commencement of each lease, this results in a positive impact to the $1.305 midpoint of normalized FFO guidance of $0.016 per share in 2026 (resulting in $1.321 per share, 1.2% increase) and $0.056 per share in 2027 (resulting in a like-for-like $1.361 per share, a 4.3% increase).

US industrial real estate markets show signs of normalizing and new supply has declined significantly, supporting ILPT’s ability to renew leases and increase rents in coming years. ILPT has a relatively long WALT of 7.4yrs (by rental revenue and has limited lease expiries in 2026 (3.1% of rental revenues) but approximately 10% of leases expire per year 2027 - 2030.

Source: Savills State of the U.S. Industrial Market Q1 2026

US industrial real estate vacancy has risen significantly from its 2022 trough to 8.2% but appears to have stabilized. Rents, which had not growth since 2023, showed ~1% growth in Q1 2026 quarter-on-quarter (and year-on-year).

Source: Savills State of the U.S. Industrial Market Q1 2026

Sub-lease vacancy has turned the quarter, declining notably for the first time in Q1 2026. This indicates that fewer occupiers have excess capacity. Most importantly, new supply has declined signficantly with space under construction below 300m sq ft (from a peak of nearly 800m sq ft in 2022) with new starts running at 200m - 250m sq ft.

Source: Savills State of the U.S. Industrial Market Q1 2026

Plenty of risks remain to US industrial real estate if a recession leads to lower consumer spending, if occupiers are impacted by higher energy prices, etc. but the environment today is significantly more supportive than it has been for the last several years.

What I think it could be worth

At $9.00 per share, ILPT trades at an implied cap rate of 7.4% and $77 PSF. I adjust for the non-controlling interest in the unconsolidated Mountain JV and ILPT’s share of the unconsolidated “The Industrial Fund” JV. This reflects a ~7x multiple of management’s 2026 normalized FFO guidance of $1.305 per share and I see a 10x AFFO multiple assuming CAPEX of ~8% of cash NOI ($25m in total vs. $23m incurred in 2025 and $17m in 2024).

Let’s harbor no illusions - I believe RMR will never let this company be acquired nor undertake shareholder-friendly improvements to its management agreement. The investor base for RMR-managed vehicles has been - in my opinion - yield-focused investors.

As a result, as much as it pains me to do so as a through and through “NAV boi”, I think the most appropriate way to value ILPT is on a dividend yield basis. I believe that now that they’ve resolved their major upcoming debt maturities and leased their largest vacancies, ILPT will increase their dividend back towards normalized levels over the next 12 - 18 months. Even if they wanted to continue to retain capital to deleverage, acquire new properties, etc. they will be limited in their capacity to do so by REIT requirements to pay out 90%+ of taxable income.

Leaving aside the highest-quality industrial REITs (such as Prologis, First Industrial, East Group, Terreno Realty, etc.) and focusing in on those that focus more on net lease, large assets with portfolio and or governance problems - external management, portfolio that include worse property types, like office, etc. it feels like a reasonable dividend range would be 7% - 8%:

• Internally-managed REITs with portfolios that are larger bulk distribution and net leases - and - trade at 4% - 5% dividend yields

• Internally-managed REITs with major governance questions and mixed portfolios that focus on industrial but include office (along with mediocre retail and other) - and - trade at 7% - 8% dividend yields.

• The worst case - - is externally-managed and ~30% of the portfolio is office and trades at a 9.4% dividend yield (and has traded at much higher yields in the past).

I think a 7% - 8% dividend yield gives ILPT basically no credit for the quality of its portfolio, especially the Hawaii assets, or for the built-in FFO growth I see for 2027 based on announced lease transactions, let alone any continued NOI growth through run of the mill leasing.

Before cutting the dividend due its financing issues following the Monmouth acquisition, ILPT paid out ~70% of normalized FFO as a dividend. While they do not disclose taxable income, REITs in general are rarely able to sustain FFO payout ratios lower than 60% due to the requirement to pay out 90%+ of taxable income.

Based on my estimate of 2026 normalized FFO of $1.32 per share (management’s guidance midpoint plus the effect of announced lease transactions), I expect they will increase the dividend towards ~$0.92 over the next year or so. This is approximately 100% of AFFO. If ILPT trades at a 7.5% dividend yield, this implies the stock is worth ~$12.30 - ~35% upside to today’s share price. A range of dividend payout ratios and yields indicate that a really negative case (10% dividend yield, 60% payout ratio) would result in 12% downside to the current share price. If ILPT earns a dividend yield anywhere close to higher-quality peers, there could be a lot more upside.

I don’t think ILPT will increase the dividend all at once. I expect it to happen over 2-3 dividend increases through the remainder of 2026 and 2027. If ILPT increases their dividend to $0.86 - $0.92 per share (65% - 70% normalized FFO) over 18 months, this would result in a 12% - 29% annualized share price return. Dividends received during this period would add to this return and depend on the trajectory of dividend hikes.

We can use a NAV-based valuation as a sense check on these estimates. Valuing the Hawaii portfolio at a 5.5% cap rate and the mainland portfolio at a 7.0% cap rate, I estimate the portfolio is worth $4.8bn, a weighted average 6.5% cap rate, and ~$90 PSF. This results in a NAV per share of ~$18 before accounting for the onerous RMR management contract. I estimate the termination fee for this would be ~$300m or $4.50 per share, bringing the “warranted NAV” down to ~$13.60 per share.

The calculation of the termination fee is a little complicated but its effectively the present value of the management fee over the 20 years of the management contract discounted at the US 10yr treasury rate + 3.00%. Which is crazy, but a contract.

Risks

RMR does something to benefit themselves at the detriment to shareholders. Over a long-enough horizon the probability of this happening increases to 1, which is why I view this as a trade rather than a long-term investment. In the near-term I think there are limited levers they can pull to really screw shareholders. The biggest risk is that the issue equity with the share price up significantly over the past year. This would be very dilutive to NAV and moderately dilutive - but probably not all that much - to FFO per share. I think some of the risk is reduced by the fact that the normalization of the dividend hasn’t happened yet and my bet is that as the dividend yield increases and shows year on year growth it will hit the screens of retail “pigs”.

Interest rates increase significantly at both short and long-end due to persistent, elevated inflation. This would likely drive higher cap rates and erode the value of their long-leased real estate portfolio. The probability of this is probably reasonably high but direct impacts of this are now lessened by floating rate debt termed out and transitioned to fixed rate. Furthermore, a limited amount of debt matures over the next 3 years (just ~$40m at ILPT share in the unconsolidated JV). But elevated and uncertain rates could impact the yield investors want from an investment in IPLT resulting in a lower share price.

Recession impacts demand in the US industrial occupier market. ILPT’s overall WALT is 7.4yrs but a lot of that is due to long-dated Hawaii ground leases. The mainland portfolio has a 4.2yr WALT and overall, ~10% of leases by rent expire each year between 2027 and 2030. A longer WALT and a manageable number of leases expiring each year insulates ILPT somewhat from a recession and reduced demand for space. In addition, the fact they’ve achieved rent uplifts of ~25% on renewals and new leasing in recent years indicates that their in-place rents are broadly below market, providing some incremental downside protection. Lastly, ~55% of their tenancy is investment grade, which provides some level of mitigation against tenant failure in a downturn across over half of their portfolio. All that being said, industrial real estate is economically sensitive and a downturn would be expected to result in lower retention rates, higher vacancy, and lower rents for the market and ILPT’s portfolio.

Inspiration for the post title: “Dance with the Devil” by Immortal Technique. listener beware, extremely NSFW and probably NSFL, but blew my (teenage) mind when I first heard it.

Background

Koneko research published a very good piece on this name just over a month ago, which (A) has a much better title than this write up and (B) covers the background and an overview of the key remaining properties. They have graciously made this piece free to read for those that do not subscribe so I recommend starting there if you don’t have any background on the company.

This write up will seek to add recent information and my views. Without fanfare - or even a press release - the company released its 10-K on Friday (Feb 27th) after the market close. This contained some interesting updates that have put this liquidation back on my radar.

Portfolio update

Note: the low / mid / high estimates for NOI are due to the fact that ELME historically reported each property’s share of total NOI as an integer. Due to rounding, 13% (for Riverside) could be as low at 12.6% or high as 13.4%. To be mindful of the range around each of these NOI estimated, I have applied this to each property.

We got a couple important updates in the 10-K:

1. They closed the sale of Elme Marietta and Sandy Springs, both multifamily properties in the Atlanta metro area, in Q1 for a total price of $112.75m.

2. They have Elme Conyers (their last Atlanta metro area multifamily property), Elme Watkins Mill (multifamily in Maryland suburbs of DC), and very importantly, their only office asset Watergate 600 under contract and longer subject to ongoing inspection periods for $128.78m.

   1. Elme Conyers and Watergate 600 are no longer listed on the Elme website, which suggests those sales may have already closed. For Watergate 600, no transaction has been recorded in the DC property tax database but that would not be expected for up to 60 days following a sale.

   2. These dispositions are expected to close in the first or second quarter of 2026, with the timeline for Elme Watkins Mill likely the longest due to regulatory requirements related to the sale of multifamily properties in Montgomery County, Maryland.

3. As part of adopting the plan of liquidation in November 2025, the company has moved to liquidation basis accounting, which means that they will no longer report NOI and other operating information but also means they provide an estimated realizable value / fair value estimate for their income-producing property, which provides a useful valuation data point.

The Atlanta metro area multifamily sales were achieved / are under contract at ~$140k per unit. Cap rate looks to be in the 5s, which feels like a good result.

More interesting is (A) higher confidence that Watergate 600 will be sold in the near-term (and at what price) and (B) the read through to the remaining Montgomery County, MD properties from Watkins Mill.

• Watergate 600 was always the biggest risk with the ELME liquidation in my mind. Management’s fair value estimate, based on the contract price, crystallizes a downside case with a price of $175 PSF. This is effectively a redevelopment / vacant property basis. However, there was a worst-case scenario where there was effectively no buyer for this Class B property in DC at ANY price. Taking that risk off the table makes this situation investible in my opinion.

• Management fair value / contract price for Watkins Mill reflects ~$210k per unit and a ~7% cap rate. The remaining MoCo multifamily properties are not too dissimilar - perhaps slightly better in quality - so this feels like a reasonable starting point to value those assets.

Management’s commentary on the remaining properties is below. Everything is on the market today.

The marketing and sale process with respect to the other five Remaining Company Properties remains ongoing. In January 2026, we began a formal marketing process for Riverside Apartments and continued the marketing and sale process with respect to Kenmore, 3801 Connecticut, Elme Bethesda and Elme Germantown (the “Other Remaining Properties”). The Company currently expects to finalize the sale of Elme Germantown in the second quarter of 2026 and the sale of Elme Bethesda by mid-year 2026. The Company also expects to continue the marketing process for the DC and Virginia properties with a goal to have these three properties under contract by mid-May. The Company continues to target completion of the sales of all Remaining Company Properties by mid-year 2026.

Why this opportunity exists

I think there are three primary reasons this opportunity exists:

1. Management have already disappointed investors twice in the liquidation process. First, their initial liquidation distribution ended up below the low end of their range following the portfolio sale to Cortland. Then, they lowered the range for the additional liquidating distribution. Why trust management now?

2. Cortland definitely cherry-picked the best assets out of the portfolio leaving the dregs, which results in a Class B, older vintage multifamily portfolio focused on DC and the MD suburbs, which have regulatory issues (rent control, TOPA) and employment challenges following federal government layoffs. Not to mention a Class B office in DC, whose office market is very weak.

3. Following the initial liquidating distribution, this is now a ~$200m market cap company that many investors, even those willing to look through the issues above, can’t even build a meaningful position in due to size and liquidity.

Valuation

At $2.15 per share, and after adjusting for Q1 2026 sales closed and under contract, ELME trades at a ~7.3% cap rate / $210k per unit. Management’s liquidation value range is $2.35 to $2.80 per share, which represents a ~7% cap / $220k per unit at the low end and ~6.5% / $235k per unit at the high end.

As of Q4 2025, management’s fair value estimates for the property portfolio along with net cash, debt, other assets / liabilities, and their estimate for costs in excess of receipts during liquidation represent ~$240m or ~$2.70 per share. This is above the midpoint of management’s liquidation value range, which is $2.58 per share. The current share price of $2.15 reflects a 20% discount to this most recent estimate.

I estimate net liquidation value of $2.50 per share, which is based on a ~7% cap rate and $225k per unit for the remaining multifamily portfolio in Alexandria, VA (Riverside), Northwest DC (3801 Connecticut and Kenmore), and Montgomery County, MD.

If my net liquidation value is achieved with a 9 month timeframe (through the end of November 2026), that would represent a ~23% annualized return / IRR. This would improve to 28% and 35% assuming the midpoint of management’s liquidation guidance of $2.58 and the Dec 2025 liquidation asset value of $2.69 respectively. I anticipate the liquidation will be resolved within a year so gains will likely be short-term and thus the position is best suited for non-taxable or tax insensitive accounts.

My valuation estimates for Riverside and the DC properties is about the same as management’s fair value estimates.

Riverside is the biggest moving piece, representing over half the property value not sold or under contract. I value it at ~$235k per unit and a 7% cap rate. I think this is roughly in line with comparables, albeit trades for large, Class B, older vintage properties like this are not that common so there are few recent similar trades. The location is not fantastic, on the southern side of Alexandria (which has seen lower demand).

ELME renovated the property in 2018 & 2019 but given its age, deferred maintenance could be a risk. I have ascribed no value to the development / densification potential of the property’s large surface parking lots. ELME has entitlements to add 727 apartments to the site and had previously valued the land at $30.4m (~$40k per buildable unit).

Where my valuations differ from management’s fair value estimates more significantly is for the suburban MD properties, where I am 10% - 20% below their values at the midpoint. These reflect values of $220k per unit for Germantown and $250k per unit for Bethesda (vs. $250k and $315k per unit respectively). Approximately a 6.5% cap rate versus a ~5.5% cap rate based on management’s fair value estimate. Given MoCo rent control and the pricing for Elme Watkins Mill, I feel comfortable being more conservative here.

Management incentives

This is perhaps a fourth reason this opportunity exists - they’re not great. The C suite will receive retention awards upon the earlier of November 2026 or 45 days after the final property is sold. These are based on the change of control provisions pre plan of liquidation are represent ~$5m for the CEO (~6x annual salary) and ~$1m - ~$1.7m (3x - 4x annual salary) for the CFO and COO.

These dwarf the short-term performance incentives adopted as part of the liquidation. These are across three dimensions with achieving targets resulting in payments of 90% of annual salary for the CEO, 75% for the COO, and 60% for the CFO. This is not nothing - mid to low 6 figure paychecks - but much lower than the retention payments which are payable regardless of performance. The three dimensions are:

• Liquidation value per share (40%), which seems promising! The problem is the target threshold is $3.20 per share, which was set based on the previous liquidation range. It seems unlikely this could be achieved, even as a stretch goal, so probably not a motivator for the management team to maximize value.

• Timing (40%) with the target being July 31, 2026.

• “Performance measures in furtherance of implementing the Plan of Sale and Liquidation, consisting of efficient operation of the Trust’s remaining assets, employee retention and successfully implementing the Plan of Sale and Liquidation” (20%) - this feels like a “gimme” payment assuming they don’t fail to liquidate the portfolio.

Management own very little stock. The CEO owns <1% of the company / ~800k shares worth about $1.7m.

I think the incentives are to liquidate quickly with little incentive to maximize value for shareholders apart from concerns around their reputation.

Key risks

Deteriorating transaction environment due to DC concerns and / or higher rates. Currently, debt and equity capital availability for multifamily, even in the DC metro area, is robust. Importantly, debt spreads have fallen and with lower base rates, all-in financing costs are in the low to mid 5% range. However, if fears around the DC economic outlook, regulation around rental housing in DC and MD, higher rates, geopolitics, etc. impact investor demand for multifamily, liquidity for these older Class B properties in regulated markets will be the first to dry up. Prompt execution of disposals is important.

Deferred maintenance and CAPEX impacting disposition pricing. Riverside and the DC properties are very old with the latter built in the 40s and 50s. There is a decent chance that a buyer’s due diligence will identify deferred maintenance CAPEX that will impact pricing. This could have a significant, idiosyncratic impact that is hard for a public market investor to assess. I have attempted to build in some buffer through a cap rate spread over Class A properties, but this may be insufficient.

By virtue of a facility put in place to help fund the initial liquidating distribution and the anticipated liquidation costs, effective leverage is quite high and will amplify the impact on equity of sales underperforming (or outperforming). Debt consists of a facility with Goldman Sachs is for 1 year through Nov 2026 at SOFR + 225bp, which steps up to 275bp in June 2026 (and 400 bps in June 2027). An exit fee of 50 bps due on partial and full repayments. The balance at Dec 2025 was $520m, which was paid down to ~$415m following the close of Q1 2026 sales. I anticipate all sales proceeds are used to repay debt before any distributions are made.

Costs in excess of receipts during liquidation, a large share of which is severance / management compensation, represents another ~$44m. In-place debt represents an LTV of ~65% relative to the value of the properties remaining and under contract. The liquidation costs represent another 5% bringing the effective leverage to 70% of property value.

As a result, a $5m / ~1% change to the remaining property value would impact liquidation value per share by $0.05 / ~2.2%.

I don’t think these risks can really be mitigated apart from position sizing. Given the leverage and portfolio quality, I am erring on the side of a smaller rather than larger position.

Abrdn Property Income is the extremely small stub (<£10m market cap) remaining after all the REIT’s assets were sold save one, which is clearly its hardest to sell, most illiquid asset: approximately 1,500 hectares (or about 3,500 acres for my fellow natural imperial measurement thinkers) of mixed woodland and peatland with natural regeneration and carbon offset potential.

Aberdeen, who manage the trust (and added the vowels back into their name earlier this year) appear to have bungled the management of the asset as extensively as catalogued on the Parks Watch Scotland blog, including here, and here.

There are few buyers for this kind of asset and Aberdeen have struggled to sell this asset, changing brokers recently to Savills from Knight Frank, and their third-party valuers have written down its value from £10m last year to £8m as of June 2025.

As of today, API.L owns the freehold interest in this site (Far Ralia in the Cairngorms National Park), has £4.3m of cash (this accounts for a dividend paid earlier this month), £1.6m of accrued grant income from Scottish Forestry, and receivables / accruals that cancel each out.

The shares are very volatile - so caveat emptor - but have recently traded around £0.020 per share (yes we’ll have to go to 3 decimal places for this one) for a market cap of £7.6m. This implies a value for Far Ralia of £2.1m or ~£1,400 per hectare (£570 per acre).

Valuing Far Ralia is not easy given that is a very idiosyncratic asset with limited direct comparables and thin buyer pool. But looking at a number of valuation measures indicate that it’s likely worth more than implied by the share price today:

• The REIT paid £7.5m for property in 2021 although this was clearly in a more accommodative liquidity and interest rate environment, especially for assets with an environmental angle.

• The REIT’s third-party valuers assessed it was worth £8m as of June 2025, down from £10m in December 2024.

• The Goldcrest / Tillhill 2025 UK Forest Market Report, published this past month, estimate values of “natural capital” land of between £5,000 - £6,000 per hectare where native woodland planting is possible but commercial forestry is not and that “the cost and uncertainties of peatland restoration have pushed peatland values back down into the low single digit thousands of pounds per hectare.”

  • Far Ralia is approximately ~440 hectares peatland with the remaining 1,030 hectares native woodlands (~790 hectares) and additional lands, including existing woodland, natural regeneration, watercourses, and open ground (~240 hectares).

  • Valuing the peatland at £1,000/ha, native woodlands at £5,000/ha, and other land at £2,500/ha results in a value of just under £5 million.

• Savills have the listing with an asking price of £6.9 million.

Other important aspects to consider in assessing the liquidation value here is sale costs to Savills for the Far Ralia land, which API.L estimate are 1.25% of the price, G&A costs required to wind-up the REIT, which are running at ~£1m p.a., and an incentive fee potentially payable to Aberdeen (more on this later).

The range of outcomes is fairly wide but I see 25% - 33% upside to my low - mid case liquidation value estimates. If the market is pricing Far Ralia correctly on an implied basis, the liquidation costs would result in -15% downside and if Far Ralia is worthless, I see -35% downside. In the best case - if they get their current asking price - there’s 50% upside.

While I think Far Ralia is worth less than they bought it for, I don’t think it’s worthless. I see the current implied value and resulting NLV as a reasonable downside case so this is a call it 2x upside to downside potential trade (but comes with timing and execution risk).

Two potential catalysts / catalytic agents indicate to me that this situation will be resolved in the near-term.

First, Aberdeen is highly incentivized to sell Far Ralia this week (prior to Nov 28th) at a value greater than £1.9m, as doing so would crystallize an incentive fee payable on the disposal proceeds of the entire REIT liquidation, including the portfolio sale last year.

Source: Abdrn Property Income Trust H1 2025 Interim Report

Aberdeen may not be able to make this happen but I have to imagine the individuals involved will have a good amount of their year end 2025 compensation tied to achieving this incentive fee.

Second, two asset-value focused investors, Staude Capital and Ursus Capital, have recently taken positions in the stock owning ~9% and ~4% respectively. Both investors appear to be focused on special situations where unlocking asset value drives the return so their involvement is a positive. Obviously such small positions will not be extremely important to these funds, but having a few larger holders focused on getting a sale consummated and the REIT wound down quickly is a positive.

Source: FrontView REIT Q3 2025 Investor Presentation

Background

I wrote up Frontview REIT in April of this year at $11.50 per share as a busted IPO that was trading at a deep discount to the value of its real estate portfolio. While the shares have appreciated by about 25% since earlier in the year and is near it’s highs for 2025, it continues to trade at a sizeable discount to its IPO price and my estimate of the value of its portfolio.

Note: as of 11/18/2025

Why write this post? I think there are a couple of reasons that indicate that the set up is more attractive today than it was at the time of my original write up despite the price being ~25% higher.

Adding to winners, “watering the flowers”, is a topic that many successful investors highlight. How to implement this effectively when investing in asset-heavy companies like REITs where the initial thesis is often “discount to NAV” is a question I grapple with.

I have seen many instances where a winning REIT has further to run - and adding would improve returns - but many others where a REIT’s stock market value has run ahead of a reasonable valuation of its assets and where selling or trimming would have been the right move. I have made both mistakes - selling winners too early, and getting round-tripped on valuation - more than once!

There’s a balance to be struck and this post is an attempt to lay out my thinking around why FrontView REIT is a flower to be watered not a lawn that needs a trim.

Recent results and improved disclosures provide greater confidence around the quality of their real estate

FrontView released Q3 results last week, which were broadly positive and most importantly, didn’t contain any negative surprises on the management team or tenant credit front after 12 properties ceased paying rent earlier this year along with the sudden departure of the President & Co-Founder due to reasons unrelated to the company (but remain mysterious).

Capital recycling supports portfolio quality as transaction values have been similar to peers

FrontView has sold 19 leased properties year-to-date with a weighted average lease term (WALT) of 8.3 years for ~$44m, a ~6.8% cap rate. These have primarily been QSR and casual dining restaurants. They’ve acquired ~$83m with a 12.1 year WALT at a 7.9% cap rate over the same timeframe.

Source: FrontView REIT Q3 2025 Investor Presentation

Not only is it positive that this capital recycling has been accretive, with a ~100 bp spread between acquisition and disposition cap rates, these values, and most importantly the sale prices, indicate asset quality is in-line with REIT peers.

Looking across similar / smaller net lease REITs focused primarily on retail / services:

• Four Corners Property Trust (FCPT): acquired $82m of properties in Q3 at an average 6.8% cap rate.

• Netstreit (NTST): acquired $204m at a 7.4% cap rate with a 13.4 year WALT and sold $38m at a 7.2% cap rate with 11.8 year WALT in Q3

• NNN REIT (NNN): acquired $283m at a 7.3% cap rate with a 17.8 year WALT and sold $22m at a 5.9% cap rate in Q3

Stable performance substantiates claim that credit issues earlier in the year were “perfect storm” and not systematic

FrontView’s occupancy in Q3 was 98% with just 6 vacant assets. Importantly, within about 6 months they have been able to resolve 11 of the 12 previous reported troubled assets with 10 either sold or leased and 1 under contract to sell. The overall recovery rate in term of ABR that has be re-leased or replaced via sale of the vacant property and reinvestment was approximately 85% for these 11 assets.

This doesn’t jump off the page as an impressive result but compares well to historical statistics for NNN REIT, a peer that reports recapture / recovery rates for both leasing (~70% rent recapture on leases to new tenants in 2024) and on the sale of vacant properties (recovered 80% of purchase price on 51 transactions in 2022 - 2024).

FVR own 1 property leased to Tricolor, which recently went bankrupt (in a large private credit scandal all its own) representing 0.9% of ABR / ~$600k of rent. Management indicated they have already received multiple offers to buy and multiple offers to lease the property.

Management didn’t speak to any watch list tenants and have guided to ~50 bps of bad debt in 2026, which they describe as in-line with historical averages and is similar to historic levels for peers.

Enhanced disclosure around current portfolio metrics and historic leasing

FrontView have continued to enhance portfolio disclosures. After expanding their tenant disclosures to include our top 60 tenants in Q2, they also reported the share of properties in the top 100 MSAs, Placer.ai visitation rankings highlighting property productivity and historical lease recapture performance.

I don’t think the share of properties in the top 100 MSAs is a super meaningful metric but at 72% it compares favorably with Four Corners Property Trust, which I regard as a good peer, at 56%. Indicative of stronger residual land value but will be very micro-location and sub-market dependent.

They also highlight that their portfolio ranks in the top 1/3 of Placer.ai ranking by state category based on trailing twelve month visits. This means their properties are in the top 1/3 for productivity for the state they are located in. Again, not a conclusive measure of asset quality but suggestive that their properties are productive and valuable for their tenants.

More meaningfully in my opinion, they highlighted that since inception of the vehicle in 2016, for 49 lease expirations 41 have renewed (84%), 3 were leased to new tenants at expiration, two properties were sold at expiration, resulting in two properties owned that are vacant. Overall, they have recaptured 105% of previous rents for the 44 leases renewed or leased to two tenants.

Source: FrontView REIT Q3 2025 Investor Presentation

This may not sound all that impressive but is a solid result for the net lease sector. These figures are right in-line with the long-term averages for NNN REIT, who have renewed 84% of lease expiries and achieved 98% rent recapture from 2010 through the first nine months of 2025. This suggests to me that FrontView’s portfolio is of higher or similar quality to that of NNN REIT.

Valuation remains compelling (despite shares having appreciated by ~25%)

At $14.50 per share, FrontView trades at an implied cap rate of 8.8% based on $60m of last quarter annualized cash net operating income and an 11.5x multiple of Q3 annualized cash FFO.

The chart below is a little out of date (for example, FVR cap rate based on a FVR share price of $13.21 pre-earnings, so is too high) but broadly, comparable net lease REITs (NNN, NTST, and FCPT) trade between implied 7.0% - 7.5% cap rates, and the “blue chips” (O, EPRT, ADC) trade between 6.0% - 7.0% cap rates.

Note: (3) Based on Company Filings, Green Street Advisors, Equity Research. Market Data as of 11/10/2025; Source: FrontView REIT Q3 2025 Investor Presentation

I see a forward 1-year “run rate” cash NOI of ~$62 million, which accounts for the Tricolor vacancy, 50 bps of bad debt expense and contracted rent escalations of 1.6% per annum.

This results in a NAV of between $17.50 and $22.50 per share applying a 7.0% - 8.0% cap rate.

This is a substantial increase from my estimated NAV range of $13.30 - $17.80 per share at the time of my original write up so its worth unpacking a little bit:

• The primary driver is a ~10% increase in cash NOI from $55.5m to $62m at the mid-point, primarily attributable to resolving the credit tenant issues, which both increased NOI and lowered non-recoverable operating expenses as vacant properties were sold.

• The increase in cash NOI was accomplished with a limited increase in net debt from ~$265m to ~$290m due to leaning into capital recycling to fund acquisitions.

• I also lowered my cap rate estimates by 50 bps based on having more evidence of their ability to sell assets out of their portfolio at a sub-7% cap rate.

A fair critique - and one that applies to many sub-scale REIT discount to NAV theses - is that valuing the portfolio at private market values results in cash flow / AFFO multiples and dividend yields out of line with public market valuations. This is due to the fixed costs of being a public company and of maintaining a REIT management team eating up a disproportionate share of portfolio NOI.

In this case, the midpoint of my NAV per share estimate would result in 15.5x AFFO and a 4.3% dividend yield. While I believe that an acquiror of FrontView’s portfolio at a 7.5% cap rate could deliver a low teens IRR with a ~10% distribution yield on a 5 year hold (assuming 70% LTV - 50% senior at a 5% rate, 20% mezz. at a 6.5% rate, $5m of annual G&A, 1.6% rent escalators, and 50 bps of bad debt per annum), that would be an overly optimistic valuation level for FrontView as a going concern in the public markets.

What I regard as reasonable peers trade at a 12.2x weighted average 2026e AFFO multiple and 5.7% dividend yield. NNN is discounted due to higher exposure to watchlist tenants / sectors (drug stores, car washes).

Source: Public filings, AFFO estimates based on company guidance (where available) and S&P Capital IQ analyst estimates via Tikr.com otherwise.

Price / AFFO multiples for peers are on the low end of their range over the past 5 years, suggesting that current valuations are, if anything, undemanding. Five year AFFO multiple averages are ~13.5x for NNN and ~16x for FCPT and NTST.

Valuing FrontView on an AFFO multiple basis indicates a range of ~$15.00 - $18.20 per share based on the 2026 preliminary guidance range and a 12x - 14x AFFO multiple (more on 2026 preliminary guidance in the next section).

Creative and pragmatic preferred equity financing provides a path to starting the net lease REIT flywheel

In conjunction with Q3 results, FrontView announced a $75m convertible perpetual preferred equity investment led by Maewyn Capital, a new firm founded by Charles Fitzgerald who is a REIT fund veteran. This is his new shop after winding down V3 Capital Management.

Source: FrontView REIT Q3 2025 Investor Presentation

I think the first reaction for many is that this looks like expensive capital at a 6.75% dividend with equity conversion at $17.00, a ~30% premium to the pre-earnings share price. Why not continue to tap debt via the RCF at a ~5.5% rate given they’re at a 5.3x net debt / adjusted EBTIDA ratio?

I think this is a smart transaction for a couple of reasons:

1. It allows them to pre-fund a $120m net acquisition target for Q4 2025 ($20m) and 2026 ($100m) on a leverage-neutral basis.

2. The convertible structure gives up upside over $17 a share but enables a dividend rate that gives them a cost of capital of ~6.25% for the acquisition pipeline ($75m of pref. at 6.75% and $45m of debt [37.5% LTV] at 5.50%).

3. This results in a 100 - 125 bp investment spread based on guidance acquisition cap rates of 7.25% and their current pipeline of 7.5%.

4. This allows them to provide preliminary 2026 AFFO per share guidance that reflects ~3% growth over 2025 at the mid-point.

5. All while maintaining a sub 6x net debt / EBITDA metric that ncessary to be regarded as investable by the “REIT mafia” (institutional investors focused on REITs)

The net lease REIT model relies upon getting valued based on AFFO and dividend yields that grow. Organic growth through rent escalations is minimal so the primary source of growth is external - acquiring properties at cap rates that reflects a spread to their cost of capital.

Since REITs are required to pay out the vast majority of their cash flows in dividends, issuing equity is necessary to do this in a leverage neutral manner. Thus, the better valuation a net lease REIT gets in the public market (in terms of a higher AFFO multiple or lower dividend yield), and the lower their cost of capital, the higher growth in AFFO per share they can generate through acquisitions due to a larger spread between acquisition cap rates and their cost of capital.

Higher growth in AFFO per share / dividends results in a better valuation in the public market, which lowers their cost of capital, and unlocks higher AFFO per share growth through acquisitions… This is the net lease REIT flywheel. Agree Realty and Essential Properties Realty Trust (ADC & EPRT) are examples of this virtuous cycle in action.

This transaction allows them to fund acquisitions and grow AFFO per share for the next ~15 months. Importantly they can grow without levering up, which increases their chances of re-rating and earning a valuation multiple that makes common equity a reasonable source of capital for 2027 and beyond. They are also not issuing highly dilutive equity at current prices, which would destroy value.

If they fail to re-rate, I think Maewyn’s involvement is positive to drive value for shareholders through a sale / M&A as:

1. They get a board seat through this transaction,

2. Are incentivized to achieve a valuation that provides >$17 per share for the common equity, not just repay the preferred, and;

3. Maewyn Capital own ~3.4% of the common equity, further aligning them with shareholders.

The pricing on this deal also looks pretty good compared to recent Cumulative Redeemable Preferred Stock offerings by Global Medical REIT and Alpine Income Property Trust at 8.00% coupons. These are two other smaller net lease REITs that face a prohibitive equity cost of capital.

Management’s preliminary 2026 AFFO guidance looks light and put in place to beat and raise next year

Securing acquisitions capital for 2026 through the preferred has allowed management to set preliminary 2026 AFFO guidance of $1.26 - $1.30 per share vs. 2025 guidance of $1.24 per share, reflecting ~3% annual growth at the midpoint.

However, this guidance looks light. While there is always some slippage due to the timing of acquisitions and dispositions, broadly using management’s guidance building blocks and assuming incremental G&A of ~5% of NOI acquired, I see an clear path to the upper end of the guidance.

Source: FVR filings, my estimates.

However, that is before considering the fact they have $20m of cash on the balance sheet as of Q3 2025 to deploy and retained AFFO after paying their dividend is ~$12m on an annualized basis. Investing this capital at a 7.25% cap rate could add $0.07 or ~5% to AFFO per share. If acquisitions are made at their current pipeline cap rate of 7.5% rather than their assumed 7.25% assumption, that would add another $0.01 to AFFO per share. Not all of this AFFO would be delivered in 2026 but I see potential run-rate AFFO per share of ~$1.38 by the end of 2026, which would reflect >10% growth vs. 2025. Selling and redeploying or re-leasing their 6 vacant properties could reflect further upside to this estimate.

FrontView is not a sure thing but feels like an attractive asymmetric risk-reward set up for 2026

FrontView remains a sub-scale REIT that is trying to find its footing in the public markets. The recent C Suite changes and tenant credit issues have all raised questions around the prospects of the company. However, in addition to the upside I see to NAV, re-rating to trade in-line with peers, and the potential to deliver AFFO growth in excess of guidance, a couple of other factors positively skew the risk-reward.

FVR’s net lease model is not economically sensitive due to tenancy and lease terms…

Focus on necessity and service retail limits economic sensitivity of tenants. Long in-place lease terms limit impact of an economic downturn on earnings and dividends. As a result, I think FrontView is fairly well insulated from an economic downturn.

… but it is rate sensitive.

Due to long-term leases, net lease REITs are sensitive to long-term rates - FrontView included. This presents upside - if rates fall, this will benefit the company. But if long-term rates rise, that will negatively impact the company.

Higher rates and tenant credit issues reflect the largest risk to the company and its returns in 2026.

Legacy investors redeeming OP units and selling stock will continue in 2026 and remove overhang

About 45% of the operating partnership (OP) units issued to legacy investors in the predecessor vehicle that were created as part of the IPO have been redeemed for common shares, which is a pre-requisite for selling them. At this pace, the selling pressure from these legacy investors should abate or end in 2026, removing an overhang that has impacted the share price this year.

The US multifamily sector has been an interesting one over the past couple of years. After a fall in occupancy and rents during COVID, demand boomed as the lockdowns waned, particularly in the high-growth “sunbelt” markets.

Combined with what REIT executives are now calling “basically free money”, this led to a multi-decade high in new multifamily development. Fear around the impact this wave of development would have on market rents and occupancy intensified in late 2023 ahead of peak delivery of this new supply in 2024.

This impacted the share prices of the US multifamily REITs and they fell 15% - 25% in Q4 2023. Over the course of 2024, however, these fears appeared overblown and by early 2025 share prices had recovered from their losses and then some.

Price return of major US multifamily REITs - Sep 2019 - Sep 2025

Source: Koyfin

Most recently, the industry outlook has been mixed. Net absorption, which measures how many units renters are occupying minus those they are vacating, saw a multi-decade high in Q2 2025. However, the REITs also reported that they saw pricing peak earlier in the Spring / Summer leasing season than normal, and slower lease up of new developments, raising fears around the trajectory of rents. This led to a sell-off of the sector post-earnings, some of which has come back. Likely contributing to the share price recovery expectations for lower rates as the US 10 year treasury yield has fallen from 4.25% - 4.50% to just over 4% today.

The sector feels like it is at a crossroads. These REITs trade at valuations which appear undemanding and reflect a discount to where assets are trading in the private market (albeit private market transaction volume has been low). There’s also not a lot of valuation dispersion between the major multifamily REITs. Leaving aside the smaller, more leveraged constituents1, they broadly trade at cap rates2 between 5.5% and 6.0% and AFFO multiples between 18x - 20x.

Given that relative valuations are pretty similar, how is an investor supposed to go about stock picking within the multifamily REIT sector? One way would be a bottom-up approach - looking at market exposures for each REIT, weighing the growth potential in those markets, applying the valuation multiples for those markets you believe are appropriate, modelling future growth for each market, etc. This is how I do most of my listed real estate investing.

However, in this article I seek to come at this question another way and ask: which multifamily REITs are likely to perform the best on a relative basis compared to the peer set in a range of macroeconomic scenarios? I think this is an interesting framework given continued uncertainty around employment / economic growth, inflation, and the trajectory of interest rates.

So without further ado, I present my US multifamily REIT relative performance framework.

For the multifamily sector as a whole, performance will likely be best in a soft landing, in which employment holds up while rates continue to moderate. The sector will do worst if we see stagflation, combining lower employment with higher inflation and interest rates.

From a top-down perspective, my hypothesis is that directional changes in employment and rates will impact multifamily REITs in a number of different ways:

• Stronger employment will benefit REITs whose portfolios are weighted to markets that have recently been the beneficiaries of job growth, those in which the supply of newly-delivered units is higher, and REITs that have larger development pipelines.

• REITs with portfolios weighted towards markets with higher barriers to entry and that have experienced less supply in recent years will be more insulated from a decline in employment.

• If rates rise, REITs with a lower cost of capital - typically due to larger scale and larger, less leveraged balance sheets - will benefit through a competitive advantage in funding growth through acquisitions and new developments.

• If rates fall, this will be a benefit to REITs with higher leverage, particularly those that are sub-scale and thus more likely to be the target of M&A.

• REITs with “structured investment programs” - typically preferred equity and/or mezzanine lending programs focus predominantly on non-stabilized properties - will benefit from falling rates but be negatively impacted by rising rates.

The coastal elites (stagflation)

The large coastal REITs will do best in a “stagflationary” scenario. Equity Residential, with the most urban portfolio and no structured investment program is likely to be the best performer the worse the stagflation is. Essex Property Trust is likely to be more rate sensitive due to higher leverage and a larger structured investment program. AvalonBay’s larger development pipeline and larger sunbelt weighting make employment a more important driver of performance.

Growth in the sunbelt (reflation)

The REITs focused on the higher-growth but also higher-supply sunbelt markets will outperform if the economy reaccelerates. MAA has the largest portfolio, lowest leverage and cost of capital, and is most weighted to sunbelt primary and secondary markets. It also has the largest development pipeline. Camden also has a low cost of capital but smaller development pipeline and its portfolio is more weighted to coastal markets and urban locations. Independence Realty Trust is more leveraged with a higher weighting to the Midwest but robust development pipeline, largely through unconsolidated joint ventures. I think this makes it more rate sensitive.

Leveraged and sub-scale (soft landing)

Smaller REITs with more leveraged balance sheets and focused on growth-oriented markets in the sunbelt, Midwest, and mountain west are sensitive to both rates and employment. Nexpoint is the most leveraged and its focus on older, value add Class B properties means its likely benefit the most from employment growth. However, I think it’s unlikely to be an M&A candidate due to being externally managed. BSR REIT is the smallest of the three, has significant leverage, with the shortest average debt maturity. It also has a relatively young portfolio focused on in-demand “Texas Triangle” markets, which I believe make it a likely M&A target, especially if rates fall (I wrote up my investment thesis on BSR here). Centerspace has high leverage compared to the peer set and unique portfolio focused on the midwest and mountain states, including the Dakotas. I think it’s unlikely to be an M&A candidate and while a rate beneficiary, also is sensitive to continued employment growth.

Rates matter more than jobs (traditional recession)

UDR is more leveraged than its “blue chip” multifamily REIT peers (like AVB, EQR, CPT, and MAA) and has the largest structured investment program in the sector. It’s portfolio composition, while having a 25% sunbelt exposure, also has significant weighting to more stable markets including Baltimore and Philadelphia that the peer set generally do not own. I think this means performance is more sensitive to rates than employment growth - but only just.

Veris is focused on urban markets in the Northeast (Northern New Jersey and Boston) and has high leverage with a relatively short maturity. I think it’s probably the most rate sensitive out of the multifamily peer set, and a likely M&A target (I wrote up my investment thesis on VRE here).

Conclusion

Clearly, more goes into stock-picking and investing in REITs than I have discussed in this piece. Valuation, strategy, asset quality, and capital allocation to name just a few of the important considerations I have not talked about.

Despite the (intentional) omissions, I hope this piece provides an interesting starting point for experienced real estate investors and generalists alike to think through how to approach US multifamily REITs. If you disagree with this framework - I’d love to hear why! I also aim to revisit this piece after a sufficiently long period of time and/or if it becomes clear exactly what kind of economic environment we’re in.

The Jersey City skyline highlighting the additions of VRE’s The Sable and Haus25

Summary

• Veris Residential owns a premier portfolio of high-quality, new apartment buildings in high-barrier markets (Jersey City / Port Imperial, Boston, suburban NJ / NY, and DC).

• Sold 2 properties and have 2 under binding contract in July at ~5.25% cap rate, have focused on selling smaller deal size, more liquid, but less attractive assets.

• At $14.70 per share, Veris Residential trades for a ~6% cap rate and ~27% discount to my estimate of net liquidation value of $20 per share.

  • NJ waterfront multifamily development sights are conservatively valued by management and could deliver significant upside.

  • Kushner Real Estate offered $18.50 per share for the company in 2022 in a weaker capital market environment.

• Board and CEO, who led liquidation and eventual take private of Northstar Realty Europe, is hand-picked by Madison International Realty and Bow Street, who own ~11% of the company.

  • President and co-founder of Madison just left board, could be prelude to M&A involvement.

  • Chief Investment Officer left company in Q2, further indications company will be wound-down.

Background

Veris Residential is a small ($1.5 bn market cap) US multifamily REIT that owns properties in the Northeast, with a large share of its portfolio located on the New Jersey Waterfront (Jersey City & Port Imperial / Weehawken). Formerly known as Mack-Cali Realty Corp, the company rebranded in 2021 to reflect a transition in strategy from owning a diversified mix of property types to focus on multifamily. This transition was largely complete in 2024 with the disposition of their final office properties. Another key event in the company’s history was the redemption of a preferred interest in the residential / multifamily subsidiary held by Rockpoint (a real estate private equity firm) in 2023.

Source: Tikr.com

In late 2022, with the majority of the transition to multifamily complete, Kushner Companies made an unsolicited offer to acquire the company for $16.00 per share. They increased their offer to $18.50 per share, but discussions broke down with each side alleging that the other walked away from the table.

Following the failed take private bid, shares have traded sideways. High leverage, rates remaining elevated, and investor fatigue have weighted on the stock. Furthermore, a bungled proposed equity raise in June of 2024 to fund the acquisition of a property in Port Imperial that was effectively rejected by investors raised questions around the go-forward strategy and management’s alignment with shareholder value.

Why now?

In conjunction with Q4 2024 earnings and 2025 guidance, management outlined an update to their strategic outlook to focus on $300m - $500m of dispositions, comprising the majority of their land bank and select multifamily properties over the next 12 - 24 months, with proceeds used to reduce leverage to below 9.0x net debt / EBITDA and fund up an up to $100m share repurchase program.

They delivered on this plan in a significant way with the announcement of their Q2 2025 results, in which they announced the sale of two multifamily properties for ~$205m with a further two under binding contract for ~$180m. With $60m of land sold to-date in 2025, this would bring total dispositions of $435m in 2025.

The properties sold and under contract are far from the best assets they own. They are located in suburban NJ, NY and in Worcester, MA. They are slightly younger and better occupied than the portfolio on average but have significantly lower average revenue per unit. Management highlighted that they focused on these properties due to their smaller deal size (~$100m per property) where they see more liquidity in the market and were able to achieve prices in line with their view of intrinsic value. These four sales were at a ~5.25% cap rate based on Q2 2025 NOI annualized (5.1% based on trailing twelve month NOI).

While management has outlined a strategy of selling assets to reduce leverage and buy back shares, delevering to a level acceptable to REIT capital markets looks clearly out of reach. Leading multifamily REITs are leveraged between 4x - 6x net debt / EBITDA are Veris’s 9x target does little to close this discount.

What these transaction do achieve is to concentrate shareholders’ interest in Veris’s crown jewels - the Jersey City and Port Imperial properties. I believe this makes the company increasingly attractive to an acquiror, especially a listed REIT peer due to their low cost of debt in the REIT unsecured market.

Supporting the sales to-date and a potential larger-scale M&A transaction is the fact that multifamily capital markets have opened back up over the past 12 months with evidence stacking up for high-quality multifamily portfolios trading at a ~5% cap rate and cost of debt falling, expanding the ability of leveraged buyers to re-enter the market.

KKR acquired a $2.1 billion portfolio across coastal and sunbelt markets in June 2024 at a ~5.25% cap rate, Equity Residential acquired a $1 billion portfolio from Blackstone in August 2024, predominantly in sunbelt markets at a 5.0% cap rate, AvalonBay acquired a portfolio of assets in Texas this year for $620m for a sub-5% cap rate and Equity Residential announced the acquisition of a $535m portfolio in Atlanta in May at a high-4% cap rate.

While long-term rates have been largely stable at levels the industry would probably describe as “high” this year, spreads for multifamily financing have continued to come in, reaching a near post-GFC low in Q1 2025 according to CBRE. With the 10 year treasury around 4.5%, this translates into 7yr - 10yr financing rates of ~6%. LTVs available are ~65% after falling to ~60% in 2022. Agency financing can be tighter, in the mid-5%. REIT unsecured financing is tighter still: AvalonBay secured a $450m 4-year term loan in April at a ~4.5% rate and issued $400m of 10-year unsecured notes at 5.08% in June, which reflected just a 85 bp spread to the US 10-year treasury rate.

What’s it worth?

Veris’s financials are a little complex due to non-controlling interests in consolidated JVs and their interest in unconsolidated JVs. In order to assess the price implied by where the stock is trading today, I’ve also made adjustments for the sales closed in July as well as use of proceeds for the properties under contract.

As of Q2 2025, Veris traded at a 6% implied cap rate and ~$520k per unit when accounting for JV interests at share. The dispositions and repayment of debt are accretive - increasing the implied cap rate by ~10 bps to 6.1% and increase my estimates of FFO / AFFO per share by about 15%. They also delever by about 1x turn of EBITDA. The company makes many adjustments to EBITDA, FFO, and AFFO, which I do not so while my estimates track what the company announces, they don’t match 1 to 1. Also to note, while I typically calculate cap rates based on NOI less property management costs, due to moving pieces around management fee and severance I have used reported NOI (and thus, implied and valuation cap rates should be higher than if property management expenses were taken into account).

While these transactions are accretive, make no mistake: Veris is not cheap on a cash flow multiple basis. I see it trading for ~28x AFFO whereas the large coastal multifamily peers trade for ~20x AFFO. Due in part to the sub-scale nature of the portfolio and to a bloated cost structure, property management and G&A expenses are high relative to the REIT’s asset and NOI base.

However, I do think that Veris is cheap relative to the private market value of its portfolio. Valuing the Jersey City portfolio at a ~5.1% cap rate and the remaining operating assets between 5.25% - 5.50% results in a valuation of the remaining multifamily portfolio of ~$3.5 billion, a weighted average 5.2% cap rate, and ~$620k per unit.

While the high value per unit figure for the NJ waterfront properties jumps off the page, I think this is actually not far off replacement cost. Veris developed Haus25, located smack-dab in the middle of the Waterfront district of Jersey City in 2022 at a cost of $635k per unit. Furthermore, just this year Boston Properties formed a Joint Venture with Albanese Organization and CrossHarbor Capital to develop a 670-unit scheme at 290 Coles, which is located in a less prime Jersey City location, with an estimated total cost of $600k per unit. 290 Coles is adjacent to Veris’s Soho Lofts, which I value a 5.25% cap rate / $645k per unit. Veris acquired Soho Lofts in 2019 for $700k a unit.

The two properties under contract are valued at their indicated prices, which reflects a 5.22% cap rate / ~$515k per unit, the remaining land is valued at management’s estimate of value, and the retail / garage commercial assets contribute ~$18m of value net of associated debt at Veris’s share. I have assumed that liquidation / frictional costs would be in the order of 3% of real estate assets or ~$115m.

This results in a liquidation value estimate of ~$20.00 per share and today’s share price of $14.70 represents a ~25% discount.

Valuable New Jersey waterfront land represents a potential upside

While I have used management’s estimate of the value of their land, I think their approach is fairly conservative. Their remaining land holdings earmarked for multifamily development represent ~2,300 buildable units at their ownership share (there’s a small parcel in Malden, MA that’s zoned for retail, but let’s ignore that for now). Management estimates that their remaining land is worth $134.2m or just under $60k per buildable unit. However, 1,400 of these units are at two valuable New Jersey Waterfront locations.

This project consists of two towers - the 68-story Harborside 8 and the 57-story Harborside 9 totaling 1,209 potential units at Veris’s share based on their reporting in the supplemental. The site is 3.9 acres currently used as surface parking. Due to its waterfront location and size, this is an excellent development site.

Veris sold two nearby, but arguably inferior, Jersey City Waterfront development sites in 2023 and 2024 for ~$70k per potential unit and $30m - $45m per acre. One could argue that development conditions have improved since these sales - rates are lower and the trajectory is more clear, rents in Jersey City have grown, and construction costs have likely declined (although tariffs and immigration could reverse this).

Valuing Harborside 8 & 9 at $70k per potential unit would result in a value of $85m or ~$21.7m per acre. As context, a 2-acre site in the Journal Square sub-market of Jersey City, which is a less well-established and appealing, non-waterfront location, sold in March 2025 for ~$24m per acre.

If the site were to be valued at $30m per acre, it would be worth $117m (~$100k per buildable unit) at at $45m per acre it would be worth $175m ($145k per buildable unit). If land value were to represent ~20% of costs (common industry rule of thumb) that would imply total cost of $500k - $725k per unit.

Haus25, which Veris developed in 2022 and “catty-corner” to this site cost ~$635k per unit and generates $43k per unit in annual NOI for a ~6.8% yield on cost. If Harborside 8 & 9 were to generate similar NOI per unit, total cost per unit could be $715k and result in a 6.0% yield on cost and 20% developer margin if valued at a 5.0% cap rate. All hypothetical numbers and hand-wavey to be sure, but this indicates to me that there could be upside to management’s land values from this site alone.

In addition, Veris own a development site in Port Imperial, which represents 191 potential units at their ownership interest (they own ~60% of the site). This was under contract in Q1 for $18.75m at VRE share or ~$100k per potential unit but the deal fell out of bed.

Attractive portfolio for an acquiror

Veris’s portfolio is high-quality and located in strong-performing, high-barrier-to-entry markets. Their portfolio is younger, requires less CAPEX, and generates higher rent per unit compared to their listed peers. They have seen healthy rent growth in their markets, which has translated into strong NOI growth.

Their NJ waterfront properties are highly attractive due to their proximity to Manhattan. This results in an affluent tenant base. Their average rent to income ratio is <11% compared to closer to ~20% for their listed multifamily peers and higher for the wider industry. They mentioned on their Q2 earnings call that 10% of their residents have 7-figure incomes. This is likely to result in less pressure on rents in a downturn and provides headroom for rents to continue to grow without stretching the finances of their tenants.

Multifamily peer benchmarking - Q1 2025 operational metrics

Source: Veris Residential June 2025 Presentation

Incentives and alignment

Board and major shareholders

Two of Veris’s largest shareholders are activist-oriented hedge funds and real estate private equity groups - Madison International Realty, which owns ~6.5% and Bow Street, which owns ~5.5%. Madison built their position in 2019 and Bow Street ran and won a proxy contest in 2020, which replaced 8 out of the 11-member Board and was the catalyst for the REIT’s change in strategy to focus on multifamily, change in the management team, and the (long-suffering) strategic review. Madison’s founder joined the Board in 2023. Effectively, the Board is hand-picked by Madison and Bow Street and I would expect them to act in the interests of shareholders.

Madison will hold their interest in their closed-ended special situations fund series and will want an exit. Rumors at the time of Kushner’s bid were that the Board was looking for a ~5% premium to the improved $18.50 offer price to agree a deal. I feel confident the board would agree to a fair offer to acquire the company.

Management

Mahbod Nia took over as CEO in 2021 after joining the board in 2020. He was previously the CEO of Northstar Realty Europe, which was a spin-off of European assets following the acquisition of Northstar Asset Management by Colony Capital. He successfully executed a “fix-and-flip” liquidation strategy - carrying out value-add intiiatives and selling properties before eventually selling the company to AXA Investment Management. Bow Street were involved in that situation and likely handpicked Mahbod to lead Veris. The remainder of the C-Suite joined subsequent to Mahbod taking over as CEO.

The CEO owns ~0.9% of the company (~800k shares worth ~$11m), and the other members of the C-Suite each own ~0.1% each (~$1.5m). A change in control would result in attractive compensation for the C-Suite that reflect 2x - 3x their annual total compensation.

Reading the tea leaves

In conjunction with Q2 2025 earnings, Ronald Dickerman, the President and Founder of Madison, stepped down from the Board after joining in 2023. One of the reasons cited was “his need to provide Madison with greater flexibility to trade Veris Residential shares in accordance with its fiduciary duty to its fund investors.”

A negative reading of this could be that Madison have given up and intend to sell their shares in order to exit the investment ahead of the end of the fund life it’s held in. A most positive reading would be that leaving the board would give Madison flexibility to work with other investors on a take-private or other M&A transaction.

In addition, the Chief Investment Officer also left the company in Q2, a fact they didn’t announce in the earnings release. This suggests they will not be focused on redeploying sale proceeds into new acquisitions. It will help reduce their bloated G&A structure and increases the probability of M&A in the near-term.

The CEO was pretty negative about both the disposition market and prospects for share repurchases to move the needle going forward. Being uncharitable, maybe there isn’t a plan beyond delever. But he may also be managing expectations around the potential for further asset sales or M&A.

Risks and opportunities

If the company doesn’t get acquired, performance will likely be lackluster due to high G&A and high leverage. Absent M&A, Veris has all the hallmarks of a real estate value trap. It trades at a discount to private market value but with an anemic cash flow yield and virtually no prospects for growth due to high leverage. The good news is that the prospects for a dilutive equity raise are low after that approach was shut down last year.

Elevated near-term (2025-2027) maturities will result in higher interest costs and potentially require cash-in refinancing in some cases. At its share, Veris has $54m of debt maturing in December this year (5.5% interest rate), ~$410m in 2026 (4.2% rate), and ~$240m in 2027 (4.6% rate).

The 2025 maturity reflects VRE’s 40% interest in the Capstone at Port Imperial unconsolidated JV. I think refinancing this loan should be manageable as I see it at ~52% LTV vs. my valuation estimate and a 10% debt yield.

They have 6 2026 maturities, which can be thought of in two buckets: 3 JVs for NJ Waterfront assets and 3 wholly-owned properties, two in Boston and one in suburban New Jersey. The debt maturing at wholly-owned properties totals ~$225m with a ~5.2% rate and management have indicated they plan to refinance using the credit facility (cost of 5.88%). I also think all three of these properties will be near-term disposition targets.

The JV debt totals ~$325m ($200m at VRE share) and will need to be addressed through property-level refinancing. I don’t think any will be near-term disposition targets as they are larger (I estimate property values of $160m, $200m, and $270m for each property). Two of the 3 are well situated with LTVs ~50% and 10%+ debt yields. BLVD 401 has slightly weaker metrics - a 57% LTV and 8.7% debt yield - and will likely be a little more challenging to refinance but doable. With a weighted average rate of 4.0%, interest after refinancing will certainly be higher. If refinanced at say a 5.5% rate, interest expense would increase by ~$4m at VRE’s share, which represents 7% of AFFO. So not terminal but a significant headwind.

Summary

• Small-cap REIT (~$700m market cap) listed in Canada but owns US multifamily apartments primarily in the Texas Triangle (Austin, Dallas / Fort Worth, and Houston).

• Owns 25 suburban, garden-style properties comprising ~6,800 units with an average age of 13 years with Houston as its largest market.

• Sold a portfolio of Austin and Dallas properties representing ~1/3 of the REIT to AvalonBay for a ~5% cap rate and ~$230k per unit.

• This is a transformative transaction, as it created a tax-efficient deal structure for operating partnership unitholders, in exchange for which they gave up consent rights on significant transactions, which opens the door for future M&A.

  • AvalonBay had originally approached BSR to acquire the entire entity with the tax needs of legacy investor OP unitholders being the limiting factor.

• Adjusting for this transaction, which closed in April 2025, BSR REIT trades at an implied cap rate of ~6.2% and ~$165k per unit.

• I estimate that at $13.30 per share, BSR trades at a 23% discount to NAV of $17.30 per share based on a ~5.5% cap rate, which represents ~$205k per unit, which represents an attractive cost basis for M&A or a take private transaction.

Background

BSR REIT listed on the Toronto Stock Exchange in 2018 but has its origins in two family-run US apartment businesses, Bailey Properties and Summit Housing Partners that merged in 2012.

Despite being listed north of the border, it is focused on multifamily apartment properties in the US sunbelt. The decision to list on the TSX was due to its small size. The costs associated with a public listing are lower on the TSX vs. major US exchanges and the hope was that due to the smaller size of the Canadian listed market, the REIT would get better banking and analyst coverage, which would at least in theory, result in a better valuation for the REIT’s units.

BSR REIT’s portfolio consists of 24 operating properties and 1 recently completed development in Austin that is in lease-up. They own suburban, garden-style apartments with an average age of 13 years.

Why Now?

BSR REIT has upgraded its portfolio significantly since its IPO. What started as a diversified mix of Class A through Class B/C properties located in primary, secondary, and tertiary markets in Texas, Arkansas, Oklahoma, Louisiana, and Mississippi has increasingly focused on Class A / B+ properties in the Texas Triangle markets of Austin, Dallas / Fort Worth, and Houston.

The first phase of portfolio repositioning took place after their IPO through 2021 when they capitalized on a strong market for sunbelt multifamily properties, which compressed the spread between cap rates for secondary markets / Class B (and lower) properties and Class A properties in primary markets, to recycle capital out of older, lower-quality assets in secondary markets into newer, modern assets in their target Texas Triangle markets.

BSR REIT portfolio rotation since 2018 IPO

Source: BSR REIT / AvalonBay Transaction Presentation, February 2025

Since 2022, rising interest rates and a wave of new supply across the US sunbelt multifamily markets have weighed on operating performance, asset values, and the stock price. A higher cost of capital has meant that external growth through acquisitions had to be put on the back burner.

Despite this challenging environment, BSR recently found a way to access low-cost capital to fund the next phase of recycling capital into higher-quality assets in its target markets.

Transformational transaction

In February 2025, BSR REIT agreed to sell a 9-property portfolio (3 in Austin, 6 in Dallas) in a significant $618.5m transaction to one of the largest multifamily apartments REITs in the US - AvalonBay Communities. This was a significant transaction for BSR, representing about 1/3 of the REIT based on gross asset value.

Overview of BSR / AvalonBay 2025 portfolio transaction

Source: BSR REIT / AvalonBay Transaction Presentation, February 2025

Pricing for the deal was attractive, reflecting $229k per unit and a “high-4s initial going-in cap rate” according to AvalonBay’s CEO at the Citi Global Property CEO in March. This was in-line with BSR’s valuation of the properties (carried out according to IFRS accounting rules) and represented a profit of >20% relative to the REIT’s purchase price of the assets, which were acquired between 2018 and 2021.

What makes the transaction particularly interesting - and transformative - is how it was structured. The three Austin properties were sold in an all-cash transaction for $187m that completed on March 31, 2025. In connection with the transaction, BSR retained $109 million of secured Fannie Mae mortgage indebtedness with an attractive interest rate of approximately 2.7% that was transferred to other assets they own.

The sale of the six Dallas properties was in the form of a “contribution transaction”, which is where things get interesting - and complicated. Consideration was $193m of cash and the exchange of 15 million Class B units for equity in AvalonBay in the form of newly formed “DownREIT” partnership units. This was about 75% of the Class B units outstanding prior to the transaction, which went from representing ~40% to ~15% of the total REIT units outstanding.

Why did the Class B units exist in the first place? They were issued as part of the 2018 IPO to the major investors in the predecessor entity before it was listed, including members of the founding Bailey / Hughes families. They were used to create a tax efficient structure at the time of the REIT IPO, which allowed these legacy investors to defer taxes that would otherwise be paid on a sale. However, as a result, the individual tax positions of the holders of Class B Units are tied to these properties. Selling them directly would create a negative tax outcome. To protect the tax position of the legacy investors, an Investor Right Agreement was put in place, which gave them the ability to nominate 3 board members, and importantly, consent rights over certain fundamental sale transactions provided their ownership interest in the REIT remained above 33%.

This resulted in a great outcome for the legacy investors. By contributing their units for AvalonBay DownREIT units, they trade their ownership in BSR for ownership of a larger, more diversified portfolio while maintaining deferral of taxes. Furthermore, the exchange ratio set with AvalonBay resulted in a valuation of the Class B units of $15.90 per share. This represented a ~6% discount to BSR’s IFRS NAV prior to the transaction but comes at the expense of third-party unitholders as it reflects a significant premium to where BSR’s units were trading at the time (~$12.00 per unit, so a >30% premium).

Most importantly, the investor rights agreement was amended as part of the transaction, and while the legacy investors maintain the right to nominate one director, their consent rights around transactions have been eliminated. This means that the Class B unitholders won’t able to effectively block future M&A transactions that could result in a sub-optimal tax outcome.

This is directly relevant as the “background of the transaction” section of the material change report filed by BSR reveals that AvalonBay’s initial approach to BSR in the summer of 2024 was to acquire the entire REIT through either an all-share or mixed share and cash transaction. This is despite the fact that Houston, which was (and is) BSR’s largest market, is not one of their target “expansion markets”.

We don’t know what price AvalonBay was offering for the whole entity and whether it represented a fair value for the REIT, but based on BSR’s filing the primary obstacle to consummating a deal for the REIT was balancing the tax impact on Class B and public REIT unitholders. With the elimination of the consent rights, this obstacle has been removed. As a result, I believe BSR has become an attractive M&A target for listed multifamily apartment REITs, private operators, or PE firms, especially as fundamentals for US sunbelt apartments are expected to stabilize and improve.

Why is BSR cheap?

Market reaction to the transaction has largely been a yawn. Units have traded up from their range of ~$12 per unit in early 2025 but have been largely range-bound between $13.00 - $13.30 per unit. I think this is for a couple of reasons.

Source: Yahoo Finance

First, the differential treatment of unitholders to the benefit of Class B unitholders at the expense of third-party public REIT unitholders creates a dark cloud over management incentives. I think the terms of the transaction clearly benefited insiders but looking forward, these protections for Class B unitholders have been removed, which mitigates future differential treatment.

Second, while I see the removal of the consent rights as opening the door to M&A in the future, I would expect many market participants to view the REIT doing a significant transaction that falls short of selling the entire REIT as lowering the take-out odds. Management has highlighted that as a result of these transactions, they will redeploy $190m into new (<10 year old) Class B+ suburban garden-style apartments in their target markets. They’ve wasted no time, acquiring three properties year-to-date in Dallas (1 property) and Houston (2 properties) to the tune of $200m. I think the muted market reaction is in part due to the view that management will be focused on growing the REIT through redeploying disposition proceeds rather than selling the company in the short-term.

Third, fundamentals in BSR’s markets continue to be affected by the significant wave of new supply that was constructed in 2023 and 2024. Austin in particularly, has seen a massive wave of new development, which has led to widely-publicized declines in rents. While supply under construction has fallen significantly, there remains a large number of newly-built apartments that are leasing up through 2025 and likely into the first half of 2026, that will slow any rent growth.

Lastly, BSR is a small REIT with limited liquidity that owns US properties listed in Canada. Liquidity in the units is limited with ~$100k of the US denominated units trading per day, and has declined over the last couple years. Analyst coverage is limited to Canadian banks. As a result, I believe BSR flies under the radar of most REIT investors.

What’s it worth?

At $13.30 per unit, BSR trades at an implied cap rate of 6.1% based on 2025 Q1 NOI adjusted for the Austin and Bluff Creek dispositions, which completed at the end of the quarter. The implied price per unit is $176k with FFO multiples of 18x and 22x (again adjusted for the sales during the quarter). They pay a monthly dividend that results in a 4.2% yield.

On the face of it BSR doesn’t screen particularly cheap on a cap rate / FFO basis and is unlikely to do so for the next several quarters as disposition proceeds are reinvested into property acquisitions and their Austin development continues to lease up.

US sunbelt multifamily peers trade at 6% - 6.5% implied cap rates and 18x - 20x AFFO. The implied valuation per unit is where BSR REIT stands out as it trades at a discount to even Nexpoint Residential Trust, which focuses on value-add Class B properties and operates with high leverage compared to the peer set and a 20% - 30% discount to the “blue chip” REITs in the space - MAA & Camden Property Trust.

Adjusting for the Dallas / Fort Worth contribution transaction, which closed in April, BSR is even cheaper on a price per unit basis with an implied valuation of $164k per unit. This is before accounting for two Houston acquisitions which closed in Q2 and were at $220k per unit (average age of 2 years), in-line with their acquisition of a property in Dallas at $220k per unit (8 years old).

I estimate that BSR REIT’s portfolio is worth $1.6bn based on a ~5.5% cap rate and valuing recent acquisitions and properties in lease-up at cost. This equates to ~$205k per unit and results in a NAV per share of ~$17.30. The current share price of $13.30 reflects a 23% discount to NAV. I think this price would reflect an attractive acquisition cost basis for a larger REIT or private equity group as it reflects a discount to replacement cost and comparable transactions.

I have assumed a higher cap rate for the remaining portfolio than the headline transaction prices for the BSR / AvalonBay transaction, which was at a weighted average 5% cap rate. Another recent comparable was Camden Property Trust’s acquisition of a newly-built apartment property in lease-up in the Austin suburb of Leander (85% occupied). Camden paid ~$190k per unit and a “stabilized yield of 5%”.

While a different sunbelt market, Equity Residential paid a “high-4% in-place cap rate / low-5% pro forma cap rate) and $260k per unit for a portfolio of suburban Atlanta apartments in Q2. Looking at replacement cost, BSR’s Austin development completed construction at a cost of ~$269k per unit in Q4 2024 and MAA acquired a Dallas property in lease-up for $274k per unit.

I think a mid 5% cap rate and ~$200k per unit would be an attractive price for an acquiror to pay, especially if / when fundamentals continue to improve. While BSR is not significantly cheaper than peers on a cash flow basis, leverage provides a double-edged sword. It increases risk if values fall but also creates more “torque” to the upside in a M&A transaction or take-private, which in my opinion makes BSR an interesting US sunbelt apartment REIT to own.

Management and capital allocation

BSR’s management have proven to be capable investors and operators. The current CEO and COO have worked for BSR and together for many years. They were CIO and CFO respectively at the time of the IPO when John Bailey, of the Bailey Properties family, was CEO. Current management reflects a degree of “changing of the guard” as no member of the founding Bailey / Hughes families is in the C-Suite. A new CFO joined this year, who was formerly a Wells Fargo real estate investment banker.

A couple of recent data points supports management’s competence in acquiring, operating, and selling multifamily real estate.

First, at a high level, the AvalonBay portfolio disposition generated attractive returns with the headline price of $618.5m reflecting a gain of $111m or over 20% vs. BSR’s purchase price for these properties. These assets were acquired between 2019 and 2021, which was a period of aggressive pricing for sunbelt multifamily apartments so cap rate compression has not been the primary driver of returns.

A good case study is the Cielo I & II apartments in the Austin MSA sold as part of the portfolio transaction. BSR acquired the properties for ~$104.5m in August 2019. This reflected ~$190k per unit and a ~4.3% cap rate. As part of the portfolio disposition, the properties were valued at ~$136.5m, ~$245k per unit, and a ~4.9% cap rate. Despite a ~50 bps spread between exit and entry cap rate, BSR achieved ~30% capital value growth over a five and half year hold period (~5% per annum). BSR paid a full market price but generated good returns by buying a quality assets that has benefitted from strong rental growth in Austin over the period and has also been able to maintain occupancy at a high level despite the rise in competing supply over the past 18 months.

Source: BSR REIT / AvalonBay Transaction Presentation, February 2025

BSR also sold a property in the Oklahoma City MSA in Q1 that provides another good “round trip” case study we can use to evaluate managements ability to add value as it was also featured in their 2018 IPO prospectus. BSR acquired the property in 2014 for $16m and implemented a $2.6m capital improvement program to renovate units and common areas, $1.8m of which was complete by the 2018 IPO.

At the time of the IPO they increased NOI by ~58%, supporting a 7.3% yield on cost and ~35% increase in the appraised value vs. capital employed. Between Dec 2017 and March 2025, when the property was sold, BSR increased NOI by an additional ~43% (which represents a ~8% CAGR over the ~10 years since acquisition) and a ~10% yield on cost. The property was sold for $28.3m, which reflected a ~50% gain relative to the capital employed, 17% gain since the IPO valuation, and ~4% annual capital value growth over the ~10 year hold period.

In addition to being capable acquirors and asset managers, management has also demonstrated pretty rational capital allocation. They have issued equity to grow when trading at high FFO / AFFO multiples and a premium to NAV but have not been afraid to shrink the enterprise and buyback shares rather than acquire properties when trading at a discount.

Since the 2018 IPO at $10 per unit, BSR raised $110m in September 2019 and February 2021 in follow on offerings at between $10.60 and $11 per share. They then took advantage of the post-COVID boom in sunbelt multifamily apartment REIT stock prices to raise $115m in April 2022 at $19.55 per share. By Q4 2022, BSR had reversed course and were repurchasing shares. They bought back ~4.6m shares in Q4 2022 and over the course of 2023, representing about 8% of shares outstanding, at $11.50 per unit.

Outlook, catalysts and risks

Stabilization of operating fundamentals in their markets, particularly Austin. While we’ve passed peak deliveries in all of BSR’s markets, lease-up of newly-developed properties continues to weigh on occupancy and rents.

Source: BSR REIT Second Quarter 2025 Operational Update

So far in 2025, BSR’s portfolio has managed to maintain relatively high occupancy and there has been some sequential improvement in lease spreads in April / May 2025 compared to Q1. Notably, blended spreads turned positive in Houston and Oklahoma City and show signs of stabilizing in Dallas / Fort Worth. New lease spreads remain negative in every market except for OKC.

A CBRE analysis of high-supply US multifamily markets indicates they expect Dallas / Forth Worth to start to see positive rental growth from Q4 2025 and from Q3 2026 in Austin. While there’s no guarantee rents will stabilize and return to growth in the next 12 - 18 months, I think there’s a good chance they do, which will flow through to BSR’s results and strengthen investor demand and pricing for multifamily properties in their markets.

BSR is continuing to simplify and upgrade the quality of their portfolio, which will make it more attractive to potential acquirors. In addition to the disposition of Bluff Creek in Q1, BSR listed their Little Rock portfolio of three assets for sale, which is currently under contract. I anticipate they will also sell their remaining Oklahoma City properties in the next year or so. This will enable them to continue rotating out of older properties in lower-tier markets into newer, Class B+ / A properties in Austin, Dallas / Fort Worth, and Houston. These assets remain in high demand, have seen pricing stay surprisingly resilient despite challenging market conditions, and I believe will make BSR a more attractive M&A target.

A key risk is high leverage relative to listed peers and significant near-term debt maturities. BSR’s net debt represents ~50% of enterprise value and approximately 9.2x EBITDA. These metrics don’t reflect distress - and in fact are in-line with how a private market leverage metrics - but REIT investors, particularly in the US, are put off by leverage in excess of 6.0x net debt / EBTIDA.

Only about 10% of the ~$775m in debt ($318m drawn on a credit facility secured by 12 properties and $457 of mortgages) matures in the next 12 months but the weighted average term is only 2.7 years. I don’t foresee significant challenges refinancing debt as EBITDA reflects ~2x debt service coverage but contractual interest rates are low - 3.8% as of Q1 2025 - and are likely to rise upon refinancing, impacting cash flow.

A significant downturn in the economy affecting wages and employment is probably the most material downside risk. Demand for apartments has been surprisingly strong in 2025 so far supported by healthy wage growth and the high cost of homeownership due to high mortgage rates. However, apartment rents and occupancy could be under significant pressure if demand reverses in BSR’s core markets while they continue to work through the high number of newly-developed properties in lease-up.

It feels a little silly to review performance as I only started to write up ideas (somewhat) consistently starting this year. However, I think accountability is an important part of improving as an investor and regularly reviewing performance - in good time and bad - provides the opportunity to review past decisions. Reviewing performance of a real estate investment, even one made in the public rather than private market, just a couple months after making it probably doesn’t provide a lot of signal but I plan to write these “performance reviews” regularly, probably on a semi-annual basis, going forward.

The context

Macroeconomic headlines and uncertainty aside, the first half of 2025 was a pretty good period for equities and listed real estate. The S&P 500 total return was 6.2% and the FTSE EPRA/NAREIT Global Real Estate Index did a little better at 6.9%. This sliver of outperformance is a small silver lining for listed real estate investors after underperforming the S&P 500 significantly since 2022.

An aside on benchmarks - I use these indices as a reference point mostly because they are both easy to find the data on and for individuals to invest in through low-cost ETFs (Blackrock’s tracks the FTSE EPRA/NAREIT Global RE index with a 14bps expense ratio). Thus, while not perfectly comparable, I think between the two, they provide a decent benchmark for me to have to beat to make investing worth my time and effort.

Updates and performance

abrdn European Logistics Income

• Write up price: £0.57 per share (Jan 2025).

• Close price: £0.62 per share (June 30), £0.057 of distributions paid to-date

• Total return: 19% [All returns in local currency terms]

• Annualized return: 43% / IRR: 52% [I intend to measure performance in terms of annualized return, which is the total return divided by the time period of the investment in years, as well as IRR to account for the well-documented issues with IRR that are frequently used to “juice” returns in the world of private market investing]

The company announced three asset sales at basically the same time I published the write up ahead of my valuation estimates. As of April, three properties (I believe their Polish assets) were held for sale and four were in the second round stages of bidding. I anticipate we see additional asset sale announcements before everyone in Europe goes on holiday later this month. If we don’t see asset sales, that would be a yellow flag.

This position has done well. I still feel comfortable with where I am marking the asset values for this liquidation but headwinds have definitely intensified in the form of both US tariffs, and the potential impact on European manufacturing, along with the fact that long-term rates have drifted up marginally in 2025. I expect near-term asset sales that will shed additional light on valuations and whether I’ve been conservative enough given the environment.

Dream Residential REIT

• Write up price: US$8.25 per share (March 2025).

• Close price: US$9.40 per share (June 30), US$0.105 of distributions paid to-date

• Total return: 15%

• Annualized return: 52% / IRR: 62%

Company has been quiet both on the operational front and on the strategic review process with Q1 results little changed from Q4. While shares have traded up, valuation continues to look attractive. If anything demand has been stronger than most expected in sunbelt markets, somewhat offsetting the supply wave that’s working its way through the system. Fundamentals will continue to be challenging through the year. I would only expect improvement in the data going into the 2026 Spring leasing season but believe there are private buyers who would take a view on the portfolio or more likely, individual assets, ahead of seeing a bottom in the data.

FrontView REIT

• Write up price: US$11.50 per share (April 2025).

• Close price: US$12.00 per share (June 30)

• Total return: 4%

• Annualized return: 19% / IRR: 20%

There’s been a lot of news at FrontView in just a couple of months. First, they’ve been through two CFOs - first, the CFO that had been at the company for less than a year departed (seemingly his choice, he wasn’t fired) and just weeks later, the interim CFO, who was also Co-CEO, was terminated for cause. They’ve now hired a new CFO, Pierre Revol, who starts July 21st and looks reasonably experienced. Formerly SVP Capital Markets at CyrusOne (data center firm) and before that was at Sprit Realty Capital, a net lease REIT that was acquired by Realty Income. If anyone has a view on this hire, please let me know!

In conjunction with Q1 earnings, they lowered their acquisition target for the year to $135m but made good progress with ~$70m acquired at a ~8% cap rate. Sold 1 property ($2m) at a 7% cap. They highlighted progress in the works at the 12 properties that are dark / tenants have vacated. Three continue to pay rent and one was sold (for $2.6m, ahead of carrying value). The remainder are in some stage of the sale / lease process and will be looking to see results on this front in coming quarters.

The C-Suite changes gives me pause. The dynamics around the Co-CEO / Interim CFO departure do feel like an idiosyncratic issue and not related to the company’s operations and finances (as management have stressed repeatedly). It will be hard to execute with all these personnel distractions but fortunately net lease real estate is basically a Warren Buffett “ham sandwich” business. And the valuation remains cheap enough that I think plenty of risk is already priced in. Just an anecdote but the shares not trading down on the news of the CFO termination could indicate sentiment is already bombed out.

In my thesis I expected there to be an overhang on the stock price as OP unitholders who were legacy investors in the REIT convert units into shares and sell. I expect this to continue and we’ll be able to track it through the number of OP units vs. common shares in their quarterly supplementals. So I don’t expect a quick recovery in the stock price.

I will be watching operations and capital allocation to determine if the thesis is playing out - their ability to address the 12 problem properties and capital allocation discipline in the face of a low share price / high cost of equity will be informative with respect to management quality.

Net Lease Office Properties

• Write up price: US$30.75 (May 2025).

• Close price: US$32.55 per share (June 30)

• Total return: 6%

• Annualized return: 54% / IRR: 68%

Write up is quite recent so not a lot of news released since but some movement under the surface with confirmation of at least two more of their more valuable properties (JP Morgan in Forth Worth, and PPD in Raleigh-Durham) being marketed for sale in addition to Google in Venice Beach, CA.

Logistea AB

• Write up price: SEK 14.50 per share (June 2025).

• Close price: SEK 15.50 per share (June 30)

• Total return: 7%

• Annualized return: 131% / IRR: 260%

Less than a month since I wrote up my thoughts on this company so results so far entirely noise. There have been a couple Sweden ex-Stockholm light industrial / logistics transactions reported with Catena selling a brand new logistics warehouse in Gothenburg with a 10 year lease to Volvo for a sub 5% cap rate (>SEK 25,000 per sq m) and Stendorren acquiring three light industrial properties in Vasteras, one with a 7-year WAULT for a 6.6% cap rate / SEK 20,000 per sq m and the other two leased to one tenant for 10 years for a 6.9% cap rate / SEK 17,000 per sq m.

Bonus mention: Inventrust, which I wrote a quick note on in May is down about 4%. In the meantime, as telegraphed they sold 5/6 their SoCal portfolio for $306m at what I estimate to be a ~5.5% cap rate. Price is ahead of my NAV estimate and redeploying proceeds will be accretive given looking at acquisitions in the mid 6% cap rate range (quick breakdown of transaction / implications here)

I don’t see a near-term catalyst to close the discount to NAV but I think the company is well-positioned to grow NOI and FFO per share at a decent 3% - 5% clip for the next couple of years assuming the economic environment doesn’t nosedive. In a downturn, I think InvenTrust’s predominantly grocery-anchored shopping centers will do OK compared to more economically sensitive segments of real estate and the economy.

Not impossible we see this as a M&A target in the medium-term if shares continue to languish. Kimco, one of the largest listed grocery-anchored shopping center REITs recently issued $500m of 10-year notes at a 5.35% effective yield and at $27.30 per share, IVT trades at a 7.3% implied cap rate with my NAV estimate being ~$33 per share based on a 6.35% cap rate. This would offer a ~100 bps spread over REIT unsecured debt cost of capital. Thin, but not an impossible proposition to build exposure to IVT’s sunbelt markets. Or maybe wishful thinking!

In addition to write ups focused on companies that I am evaluating as a new investment, I want to also publish entries in my “investing journal”. I intend for these posts to focus more on thinking through portfolio allocation decisions with respect to existing positions in response to changes in the company, operating conditions, and / or its price. As a result, they’ll be lighter on the company’s background and the investment thesis.

The objective for me is for writing to add rigor to my thinking and potentially get feedback and new perspectives from you, the reader. I hope these pieces will also be useful to you by highlighting situations that may be of interest or by providing an opportunity to reflect on your own investment decision-making through the prism of my (flawed) process.

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Logistea: a brief background

• Logistea was formed when a group property investors took over a fashion retailer - Odd Molly - and sold the retailing operation and renaming the company in 2021.

• During the post-GFC period of low rates, Swedish listed property companies heavily utilized short-term, floating rate debt and a complex ownership web had developed, where a handful of private individuals and holding companies owned interests in most of the listed PropCo’s in the country through Matryoshka doll-like holdings (reproducing the interconnected ownership structure chart down below to show the extent of the crazy-ness).

• Rising rates ended and reverse the debt-fueled rise of the sector, with SBB, one of Sweden’s largest listed property companes, being a large and well-covered example. Logistea was not spared as (A) it had significant floating rate bond debt, which became unsustainable and (B) several large shareholders, including Ilija Batljan, the founder, CEO, and larger owner of SBB, were liquidating their positions, resulting in a low share price and high cost of equity.

• Logistea carried out a deeply dilutive rights issue at SEK 6.25 per share in September 2023 to raise the capital to address their debt challenges. The period leading up to the rights issue and around the rights issue is when I built most of my position in the company.

• Last year, after the share price rebounded ~100% from the lows, Logistea raised SEK 250m in equity at SEK 13.20 per share and then combined with KMC Properties in an all-share deal that expanding its portfolio from Sweden to include Norway, Denmark, Finland as well as a smattering of assets in western Europe. This transaction significantly increased the scale of the business and its market cap, which is in the region of USD 700 million today.

Logistea today

Logistea is a net lease industrial REIT focused on the Nordics (90% of the portfolio) and western Europe (10% of the portfolio). The portfolio is well-let with 97% occupancy, has a long lease term (9.3 years), 91% of their leases are triple-net, and 99% have CPI-linked reviews. Some of their assets are modern distribution warehouses but many are industrial and manufacturing properties that are likely to see lower rental growth over time.

Logistea is no longer cheap. At SEK 14.50 per share, it trades at an implied cap rate of ~6.5%, ~15x pre-tax profit from property management or “PFPM” (a metric similar to FFO in the US) and ~18x post-tax PFPM. A key driver of the significant increase in PFPM / earnings per share over the course of 2024 has been refinancing higher-cost KMC Properties debt, especially that denominated in Norwegian NOK, at lower rates.

The business trades at a ~10% premium to my NAV estimate and a 5% discount to management’s preferred NAV measure (EPRA Net Reinstatement Value [NRV] - a measure of NAV that excludes intangible assets and any taxes / costs related to disposing of the property portfolio) of SEK 15.40 per share.

On relative basis it does trade at a somewhat cheaper valuation compared to other Swedish PropCos that focus on industrial & logistics real estate with an implied cap rate in the mid 6s and profit from property management yield in the high 6s. It trades cheapest out of the peer set on a price per square meter basis and on the cheaper end on an implied cap rate / PFPM basis, albeit I’d argue the yield premium to Catena / NP3 / SLP is mostly justified due to Logistea owning more industrial properties with lower expected rent growth versus logistics warehouses.

In 2025 Logistea has continued to make sizeable acquisitions of operating properties and raised additional equity this past month - SEK 500m at a share price of SEK 13.90.

So as it stands, Logistea has gone from a discount to NAV story to trading around NAV and issuing equity to grow the portfolio. What should one do from here?

What does management say they’re going to do?

Management’s financial targets are on a per share basis, which indicates at least some focus on value over size alone. They aim to deliver growth >15% in PFPM and EPRA NRV per share over a five-year period.

They have also adopted limits on leverage, which they stipulate as keeping below a 60% loan to value ratio and maintaining at least 1.8x interest cover.

Management intends to achieve these target primarily through accretive external growth through acquisitions and to a lesser extent, developments.

Opportunities

Growth through accretive acquisitions

In conjunction with the capital raise Logistea highlighted the financial impact of acquisitions made through early June (emphasis mine):

So far during 2025, Logistea has acquired properties in Sweden, Norway and Finland for an amount of approximately SEK 1,760 million, of which property acquisitions of approximately SEK 450 million were completed during the first quarter. Together, these acquired properties have a leasable area of 147,000 sq m, an annual rental value of SEK 149 million, an average remaining contract length of 11.6 years and an estimated initial yield of 8.3 percent. These acquisitions in 2025 are estimated to increase profit from property management with SEK 0.21 per ordinary share.

Logistea sees additional interesting investment opportunities throughout the Nordic regions and considers the current market conditions as very favourable for value creating acquisitions that contributes to the Company's financial targets. At the same time, the Company considers its financial risk limitations to enable an efficient external borrowing that is beneficial to both Logistea and its shareholders. The proceeds from the Share Issue are therefore intended to be used to finance such investment opportunities and to maintain good access to funding and a balanced capital structure.

Acquisitions year to date are accretive to Logistea’s cost of capital (implied cap rate of ~6.5%, profit from property management yield of ~7%, and cost of debt of ~5%) and have extended the portfolio’s WALT. With a profit from property management earnings capacity of 1.00 per share at the beginning of 2025, these acquisitions increased PFPM per share by ~20% before dilution from the equity issuance and ~12% taking dilution into account.

Logistea remains a fairly small company with a SEK ~7bn market cap and SEK ~13.5bn enterprise value (US$ ~700m and $1.35bn respectively) so acquisitions can still move the needle. With the proceeds from the June equity raise of SEK 500m plus SEK ~250m of retained cash flow in 2025 and utilizing 50% LTV debt, this would give the company an additional SEK 1.5bn of dry powder to deploy this year. If deployed at an 8% cap rate and interest costs remain around 5%, this could support further PFPM growth of SEK 0.16 per share or ~15% to SEK ~1.30 per share.

Improving market fundamentals

Nordic industrial & logistics market fundamentals were very strong in 2021 & 2022 due to the global surge in warehouse demand due to e-commerce during COVID but weakened significantly over the course of 2023 & 24 as there was a large response of new supply.

Swedish industrial and logistics vacancy neared 10% at the end of 2024 due to the wave of new supply, much of which was speculative development. The development pipeline has slowed down considerably with most of the 2025 & 26 deliveries anticipated to be built-to-suit rather than spec, which could support stronger industrial and logistics market fundamentals and rental growth going forward.

US tariffs could derail this market recovery, as the US is Sweden’s third-largest trading partner. Motor vehicles and machinery and equipment together represent ~40% of Sweden’s exports to the US and these products will be directly in the tariff crosshairs as well as being large occupiers of industrial and logistics space. On the other hand, anticipated growth in the defense industry and in nearshoring could offset some of the tariff occupier impact.

Cap rate compression

Data suggests that at a broad, industry-level, cap rates across most sectors in Sweden may have peaked in 2024 and even seen some tightening in the second half of the year.

The Swedish central bank began cutting rates in 2024 and rates are now down to 2.25% from a peak of 4.00%. Macro-economic environment looks fairly supportive of rates to remain stable or continue to fall in 2025 absent a sudden, unexpected rise in inflation.

Stable / lower rates could translate into cap rate compression over the next 12 - 18 months, which would benefit Logistea’s portfolio, which is likely to be very sensitive to interest rates give its long in-place WALT. On the flip side, lower inflation would result in lower in-place rent growth through CPI-linked escalations.

Risks

Tenant credit and concentration

Logistea’s tenants are a mixed bag in terms of credit quality and the portfolio is very concentrated with the top 7 tenants representing over 50% of rental income.

Bankruptcies have impacted the portfolio to the tune of 3% of rental income in 2024 (with the majority in Q4) and ~1% in Q1 2025. While Logistea has been successful re-leasing space vacated by bankrupt tenants in short order, weak tenant credit poses a risk to income going forward.

BEWI ASA, which is a Norwegian producer of packaging, components, and insultation, became the company’s largest tenant (29% of rental income) following the acquisition of KMC Properties. In addition to leasing assets in Sweden and Norway, they lease all of Logistea’s properties in western Europe. BEWI is not a financially strong company and while they’ve undertaken a number of strategic combinations and asset sales to lower debt, while net debt has reduced over time, net debt / EBITDA as of Q1 2025 was over 5x. Were BEWI to go into bankruptcy, this would materially impact Logistea’s rental income and NOI.

BEWI was a major owner of KMC Properties and following the merger and in conjunction with the equity raise in June, they have been selling down their interest in the company. They owned a ~15% interest as of Q1 2025, which was sold down to ~7.5% as of June 3rd, 2025.

Short credit maturity

Debt for Swedish PropCo’s tends to be shorter-term than in other countries with bonds and bank loans often being for 3 year terms. This results in a shorter maturity profile than I would like. In this case the weighted average debt maturity is 2.5 years. This creates significant maturities in the next months. While refinancing this debt today doesn’t feel like an issue, in a period of capital markets stress it could be tricky.

Leverage metrics now make sense and will support refinancing, particularly in the context of the Swedish market and they fact they are a taxpayer as a PropCo rather than a REIT, at <50% LTV, <8x net debt / EBITDA, and 2.2x ICR but I’d like to see them seek to put longer-term debt in place if possible and ladder out their debt maturities.

Catalysts

There are no major catalysts on the horizon. I think share price appreciation will be due to growth in profit from property management per share and growth in the dividend, which was initiated this year.

Conclusion

Logistea is a ~3% position for me and while a lot of the discount to NAV juice has been squeezed, I think it’s worth holding due to the growth in earnings per share coming through from the accretive acquisitions they’ve already closed.

The recent equity raise gives them dry powder for additional acquisitions on the order of 10% of enterprise value. I see a path to management’s 15% growth in earnings per share target at least over the next couple years even without much like-for-like rental growth through indexation.

I am decidedly late to the party on NLOP, which has been discussed comprehensively by a couple of investors who nailed this spin-off from WP Carey in late 2023 out of the gates including David Bastian at Kingdom Capital Advisors (@kingdomcapadv on twitter, write ups on Seeking Alpha here and an update here) and Dave Waters at Alluvial Capital (writes at along with thoughtful and macro-pontification-free quarterly letters).

Not only am I late to the party, worse yet, I did a good amount of work on the assets both pre and post spin and have been consistently too conservative in my estimates of what they’d be able to sell properties for and left thumb-sucking as I thought there was an insufficient margin of safety around the liquidation. Apart from a couple of duds, particularly in their international portfolio, the company has been successful in selling office properties at attractive prices in a tough market.

While my valuation (more on that later) remains more conservative than others I’ve seen, I’ve come around to the view that NLOP represents an attractive risk-reward today.

So why now?

1. The company repaid expensive senior and mezzanine debt (with interest of 10% and 14.5% respectively) secured by the majority of their assets in April 2025. This financing was put in place at the time of the spin off. Now its repaid, this leaves the vast majority of their portfolio unencumbered and eliminates the associated significant interest payments.

   1. As an aside, in my past experience, a good time to get involved in REIT liquidations is once the debt is paid off. Any hype has typically blown over, there’s been enough successful sales to get a good sense of valuations. Furthermore, no leverage means there’s less downside if you’re too optimistic and the company will typically have more runway without interest payments to service.

2. Significant lease extensions and renewals have helped mitigate what was a lease expiry “cliff” in 2025. Most notably, Google exercised an extension option in LA ($3m of ABR) in Q4 2024 and JP Morgan signed a 3-year renewal in Tampa ($1.3m in ABR at a +40% mark to market) in Q1 2025. While the WALT is not long overall at just over 4 years, and there are known, large tenant moveouts in 2025 (Bankers Financial in Tampa being one), NOI and cash flow won’t evaporate due to a large number of leases expiring this year.

3. The pace of sales has slowed from earlier in 2024 but pricing achieved remains robust, even for properties that are vacant or with a short in-place lease term. This includes the sale of two Houston properties, one in Q1 with <1yr WALT (located in Northwest Houston) and a vacant property (located in the Woodlands) in May, both for ~$80 PSF.

Valuation

At $30.75 per share, NLOP’s enterprise value adjusting for the repayment of the mezzanine loan in April 2025 is ~$540m. The company trades for an implied cap rate of ~14.5% based on just under $80m of annualized pro rata cash NOI and ~$100 PSF. Based on Q1 figures annualized, it trades at approximately 10x AFFO.

The portfolio comprises 37 properties, is 85% occupied with a 4.1 year weighted average lease term.

Based on an asset-by-asset valuation, I think the portfolio is worth ~$700m based on a ~12.5% cap rate / ~$125 PSF. I assume the remaining encumbered properties, which are subject to non-recourse financing are handed back to their lenders and no proceeds are received above the debt balance.

I believe that in today’s market, properties with longer than a 5-year weighted average lease term (WALT) trade on a cap rate basis. As a result, I’ve valued NLOP’s properties in this category are based on a ~9% cap rate.

Properties with a shorter WALT or those that are vacant trade based on market participants’ view of the present value of the contracted ABR and a residual vacant possession or land value. Broadly, I’ve valued the contracted ABR at a 10% discount rate and the “residual vacant value” of the properties with a WALT <5 years at $40 - $60 PSF. There are a few exceptions where properties have attractive tenants and WALTs that are close to 5 years (the JP Morgan properties in Forth Worth and Tampa) or properties in submarkets where land values are high (Omnicom in Playa Vista, CA).

Approximately 1/4 of the vacant / WALT <1 yr value bucket has already been crystallized in the $16.3m sale of 10101 Woodloch Forest Drive in The Woodlands to Howard Hughes in May 2025. The remaining properties in this bucket are valued in that $40 - $60 PSF range.

Once cash and other assets / liabilities are accounted for and an allowance is made for disposition costs and the termination fee payable to WP Carey under the terms of the external management contract, this results in a NAV per share of ~$38.20 and at $30.75, NLOP trades at a 20% discount today.

I estimate that just under 3/4 of the unencumbered portfolio value is in the top 10 properties, which are predominantly longer-leased, investment-grade tenants, with a two being located in high-value California sub-markets (Venice Beach and Playa Vista in LA).

If these valuations are right, these ten properties alone would cover NLOP’s current enterprise value leaving aside the remaining debt, which is secured by the portfolio’s encumbered properties.

The upside

I anticipate that the portfolio will be liquidated over the next 18-24 months. The portfolio currently generates about $45m or $3.00 per share in annualized AFFO based on Q1 2025 figures and CAPEX.

Looking at 2025 lease expiries, adjusting for known leasing and assumed properties handed back to lenders and assuming half of the remaining leases are renewed at lease rates that are 75% of the in-place levels results in run-rate cash NOI of ~$65m by the end of 2025 (down from $80m based on Q1 2025 annualized). Much of this NOI decline is offset, however, by the reduction in interest expense from the repayment of the mezzanine loans. I estimate that $65m of cash NOI would result in ~$40m or ~$2.70 per share in annualized AFFO to start 2026.

While the timing of dispositions and leasing CAPEX needs are difficult to forecast, I estimate NLOP will produce retained cash flow between $4.00 and $5.00 per share over the 18-24 month liquidation period, which combined with disposition proceeds at my NAV estimate would result in a ~1.4x multiple and 19% - 24% IRR.

The biggest risk: KBR Tower

KBR Tower in downtown Houston is NLOP’s largest asset. While it’s majority let to KBR Inc. for a further 5 years (they lease ~85% of the property by area and represent 95% of its ABR), as a 1970s vintage high-rise in my opinion it also represents the largest risk in the NLOP portfolio.

Houston’s office market has suffered over the past several years with ~3.5m sq ft of negative net absorption in 2024 through 2025 Q1 and the vacancy rate exceeding 24%. The best office submarkets in Houston tend to be suburban - including The Woodlands, the Energy Corridor, and Galleria - and the vacancy rate in the CBD is higher, around 30% as of Q1 2025.

An older building like KBR Tower, which will likely require significant CAPEX to bring it up to fully modern standards and lease up, combined with anemic market fundamentals, severely limits the buyer pool and the price they are willing to pay despite the 5 years remaining on the KBR lease and associated, significant cash flow. A positive associated with the property is that it includes a multi-story parking garage so the property comprises two full blocks in the CBD / 2.9 acres.

I have tried to look at valuing this asset on the basis of adding the present value of the remaining ABR to an assessment of the value of the asset if vacant today rather than on a cap rate basis. My best guess for the value of KBR Tower is ~$118m, which represents an 18% cap rate and ~$111 PSF.

There are not a lot of easily available comparables for Houston downtown land but the best is probably the sale of 1801 Smith in 2021, which was near-vacant and sold for $45 PSF. This property is next to KBR Tower and sits on a full city block. I estimate the price equated to ~$11m per acre based on a site area of 1.9 acres. The property was subsequently redeveloped into apartments. The large / deep floor plates of KBR Tower would make residential redevelopment of the existing building difficult.

One City Centre sold this year at a pretty similar price $11m / acre and ~$40 PSF. Skanka paid ~$15m acre for land sites in the CBD in 2019 and an office repositioning opportunity sold for $45 PSF / $21m per acre in 2024.

The net present value of the leases at KBR Tower (including a 7.78% rent step up in the KBR lease in 2027) is ~$83m applying a 10% discount rate and based on the 2.9 acre site, the “residual vacant value” for the property would be $32m / $30 PSF to $38m / $35 PSF based on a price of $11m to $13m per acre. This would indicate a valuation range of $115m / $108 PSF - $121m / $114 PSF.

Another way to estimate “residual vacant value” would be to estimate what the property would be worth today if repositioned as office and deduct an estimate of the leasing costs required in the form of free rent, tenant incentives (TIs), and leasing commissions (LCs). Assuming 85% occupancy at $20 PSF NNN rents (10% below the current rent paid by KBR) and applying a 10% cap rate I think the property would be worth ~$172m / ~$160 PSF.

Source: Oxford Partners Q1 2025 Houston Office Market Report

Leasing up the property would require significant incentives and leasing capital, however, with a local broker estimating 12 - 18 months of free rent on a 10-year lease and build-out allowances (TIs) of $75 - $120 PSF. Assuming 15 months of free rent and TIs / LCs (lumping those together due to laziness) of $100 PSF would result in “residual vacant value” of ~$43m / $40 PSF today, with a range of $25 - $50 PSF feeling reasonable depending on the level of TIs and cap rate the stabilized building could be sold at.

The best outcomes for KBR Tower would be either a long-term renewal by KBR or that they acquire the property for their continued use as their headquarters. These scenarios would create upside to my valuation estimates but given the availability of newer, and better located space in Houston today, I think the probability of this is slim.

If we assume no residual value for KBR Tower and just the NPV of contracted ABR, this would reduce my NAV estimate by $2.35 per share to $35.85 per share, which would erase ~1/3 of the discount to NAV that I see the company trading at today.

Summary

• Busted October 2024 IPO with 35%+ sell-off since March 2025 triggered by tenant credit issues and exacerbated by lock-up ending for investors in the predecessor entity, a private REIT.

• Owns outparcel, net lease real estate diversified across locations, industries, and tenants focused on predominantly necessity and discount retail, services, and food & beverage sectors that are less economically sensitive.

• Portfolio is 97.7% occupied with a 7.2 year lease term and have 1.7% annual rent escalators.

• Trades at a 9.5% cap rate, 10.5x cash FFO, and pays a 7.5% dividend yield (~80% cash FFO payout ratio), representing an attractive discount to best peer Four Corners Property Trust (FCPT: ~6% cap rate, ~16x FFO, and ~5.2% dividend yield).

• Trades at a 25% discount to NAV estimate based on an 8% cap rate with upside potential from replacing rent from tenants with credit issues (~4% of ABR) and debt-funded accretive acquisitions (~$55m closed or U/C in 2025 YTD at a 7.9% cap rate).

• Insider purchases by Co-CEOs and Director at 15%-20% premium to current share price.

Background

Credit where it’s due: I first saw this idea posted by @PrivateEyeCap on twitter who also wrote a Seeking Alpha article on the company that provides a good overview of the business and valuation albeit I have not consulted their valuation work in doing my own analysis.

FrontView REIT owns net leased outparcel real estate. These are freestanding buildings typically located in and around existing shopping centers. FrontView’s strategy is to focus on outparcels with frontage - that have visibility and easy access from highly-trafficked roads. These properties are predominantly leased to dining, healthcare, and other service retail tenants.

Source: FrontView March 2025 Investor Presentation

FrontView IPO’d in October 2024 at $19 per share and while shares did OK through 2024 and into 2025, they’ve fallen off a cliff since March.

Source: Koyfin

The selloff began in earnest after the company revealed that they had taken back, or expected to take back, 12 properties representing 4% of ABR in their Q4 earnings on March 19th. Half of the impact was recognized as bad debt in Q4 with the remaining 200 bps to come in Q1 2025.

Credit issues are the bane of net lease real estate investors as they disrupt what are overwise very predictable cash flows and can result in losses if properties have to be sold vacant. These issues—and the fear that there could be more skeletons in the closet—resulted in a ~35% decline in the share price since March. Interestingly, the sell off intensified after the April 2nd tariff announcement that kicked off a US market correction, while the best public market peer, Four Corners Property Trust (Ticker: FCPT - more on this later), has been basically flat (down only ~5%) over the same period.

Source: Koyfin

Why now?

FrontView trades at an attractive valuation as shares have sold off indiscriminately in the current market downturn despite the fact that the net lease business model is stable and largely not economically sensitive.

One reason there are more sellers than buyers is that the lock-up period for certain investors in the private REIT predecessor entity ended on March 31, 2025. These investors owned ~45% of the REIT in the form of operating partnership units. Approximately 10% of the operating partnership units were converted to common shares in Q4 2024, a required first step before the shares can be sold. While volume has not spiked since the 31st, I believe many of these continuing investors will be selling now that liquidity is available, regardless of price.

In addition, FrontView is a small REIT with a <$350m market cap—it’s too small for most market participants to buy or care about. Furthermore, the fact that Four Corners Property Trust has a very similar portfolio, is better established after spinning out of Darden Restaurants in 2015, and is ~9x the size with a $2.8bn market cap means that is represents a more accessible way to access net lease outparcel real estate.

I believe FrontView is well-positioned in the current environment as while net lease real estate has limited internal growth prospects, the risk-reward is attractive today as:

• Their tenants are predominantly necessity, discount or service-oriented and thus less economically sensitive than many other real estate sectors.

• The portfolio weighted average lease term is long (>7yrs), which provides stability in NOI and cash flows. Occupiers typically also have lease extension options and tend to not vacate so long as the business remains solvent and they can trade profitably from the location in question.

• The net lease business model limits both operational and capital expenditure, resulting in high cash conversion.

FrontView’s IPO also put their balance sheet in a solid position. Proceeds were used to reduce leverage to ~$270m as of Q4 2024 and ~5.5x net debt to EBITDA. Leverage is in the form of a $200m term loan and a $250m revolving credit facility, which has $70m drawn and $180m available. These facilities mature in October 2027 with two 1-year extension options and are priced at ~130bps over SOFR. In early March, they entered into an interest rate swap to fix the $200m term loan at 4.96%.

In at least a small vote of confidence, both Co-CEOs and a Director purchased ~$375k of shares March 21st - 25th at about $13.50 per share, a >15% premium to the current share price.

Portfolio

FrontView owns 307 properties comprising 2.4 million square feet leased to 150 different brands across 15 industries and 35 states. The portfolio is diversified with the top 10 tenants representing ~22% of rent and the top 5 states (Illinois, Texas, Georgia, North Carolina, and Ohio) representing ~40% of rent.

Source: FrontView March 2025 Investor Presentation

The largest industry is dining (casual dining and quick service restaurants) at ~30% of rent, followed by medical and dental providers (~15%) and general retail, financial institutions, and automotive stores and dealers each at ~10%. About one third of the portfolio is investment grade.

Source: FrontView March 2025 Investor Presentation

Valuation

Based on a share price of $11.50, FrontView’s market capitalization is ~$325m and adding debt of ~$270m and deducting cash of ~$5m arrives at an enterprise value of $590m. I estimate that the portfolio owned at Q4 2024 will generate cash NOI of $55.5m and cash FFO ~$30m after ~$25m of G&A, interest, and other expenses. My NOI estimate accounts for 3% of bad debt in the year—2% from the known tenant issues and the high end of management guidance of an additional 1% for other potential issues throughout the year.

As a result, at $11.50 per share FrontView trades at an “ex-growth” (i.e. before factoring in external growth through acquisitions) implied cap rate of ~9.5% and a 10.5x cash FFO multiple. The portfolio is valued at $1.9m per property and ~$245 PSF.

I see at a ~25% discount to NAV of ~$15.45 per share based on an 8% cap rate. This would represent a ~14x “ex-growth” cash FFO multiple and result in a ~5.5% dividend yield.

This cap rate range looks reasonable given recent transactions:

• In Q4 2024, FrontView acquired 29 new properties for $103.4 million at a weighted average cash capitalization rate of 7.9% and a weighted average lease term of 11 years.

• Subsequent to quarter end they acquired 15 new properties for $37.9 million at a 7.8% cap rate and a weighted average lease term of 12.5 years and have an additional $18.2 million of properties under contract at a 8.2% cap rate.

• Also subsequent to quarter end, they sold one property—a Freddy’s restaurant in Jacksonville—for $2m at a 6.9% cap rate. Worth noting that this was the one remaining Freddy’s they owned after the other went dark and is included in the 12 properties / 4% of ABR with credit issues.

This cap rate range also looks reasonable looking at historical acquisition yields that averaged between 6.3% - 7.5% across a subset of net lease REITs since Q3 2020. This includes periods in which long-term rates were much lower than today but also includes the higher rate period since 2022.

Source: NETSTREIT March 2025 investor presentation

These cap rate ranges also look reasonable based on the the Boulder Group’s Q4 2024 net lease market report. They see retail net lease cap rates (blue line in chart below) reaching ~6.5% up c. 75 bps from the lows in early 2022. Looking at major FrontView tenants with lease terms <10 years, cap rates tend to be in the 7% - 8% range, even for sectors facing challenges (drug stores - CVS and Walgreens - and dollar stores).

Source: The Boulder Group Q4 2024 Net Lease Market Report

Peer comparison

There is one other REIT that focuses on outparcel net lease real estate, which is Four Corners Property Trust (FCPT). Based on a $27.25 share price, they trade at a 5.9% implied cap rate, $480 PSF, and a 16.1x cash FFO multiple. Their portfolio is similar to FrontView’s but has a higher investment grade tenancy (driven by their Darden tenant concentration), higher rent PSF, and a slightly lower contractual rent escalators.

FCPT’s dividend yield is 5.2% and they payout 84% of cash FFO compared to FrontView’s 7.5% yield with a 78% payout ratio.

I believe the FCPT portfolio is higher quality than FrontView’s as they’ve leveraged their lower cost of capital to acquire better assets at lower cap rates ($199m of properties acquired in the last 5 months of 2024 at a 7.1% cap rate). They’ve also earned a premium valuation in the public markets as they’ve maintained a low-leverage balance sheet and been judicious in only issuing equity when its cost allows for accretive growth. However, the current valuation differential is extreme and while I don’t think they should trade at parity, a 2x-3x cash FFO multiple premium and ~100 bps cap rate discount would feel like a more appropriate level.

Potential upside

Near-term upside to current NAV and valuation could come in two primary forms:

• Re-lease or sell the 12 properties that were vacated by tenants over the last two quarters.

• Accretive external growth through acquisitions.

Management highlighted they are in negotiations with 6 different users for the 12 assets that went dark in Q4 2024 including three properties that are under contract for sale, two properties that have letters of intent for sale, and one lease that is under negotiation. If the three properties under contract are sold and the proceeds are re-invested, management indicated that would represent about 1/3 of the 4% of lost ABR or ~$750k of cash NOI with the three assets with outstanding LOIs and leases under negotiation representing another ~17% of the 4% of lost ABR or $400k of cash NOI.

Converting these transactions has the potential to increase NAV by ~$0.50 per share based on an 8% cap rate (+3.4%) and increase cash FFO by $0.04 per share or ~3.8%. Management have indicated that the assets under contract could close and be reinvested in H1 2025.

FrontView also continues to see what they view as attractive acquisition opportunities and have ~$56m of properties closed or under contract in 2025 to-date at a 7.9% cap rate. Management guided to 2025 acquisitions of $175m - $200m at above a 7.5% cap rate. While equity issuance would be dilutive given the current share price, cost of debt on the remaining ~$180m of capacity on the revolving credit facility is ~5.7%, which suggests a spread of acquisition cap rate over cost of debt of ~200 bps. Assuming some incremental G&A related to these acquisitions, hitting the midpoint of their acquisition guidance could translate into ~$0.08 per share of FFO, a 7.3% increase.

Funding these acquisitions through debt is possible but would take their net debt to EBITDA to ~8x. Public market investors would view this as an unsustainable level (and management have guided to ~6x net debt to EBTIDA over the long-term vs. ~5.5x today) and would have to be addressed through subsequent asset sales and / or equity issuance.

A final potential upside point could be a decline in long-term rates, due to an economic downturn, or otherwise, which could result in lower cap rates for net lease properties, which are typically viewed as more stable and safe during a downturn (despite FrontView certainly not trading like it).

Key risks

Existing credit issues are the tip of the iceberg. FrontView has pursued a strategy in which they claim to have traded investment grade tenancy in favor of real estate quality. While they claim that the current tenant credit issues are an abnormal bubble, there is the risk that their underwriting has taken too much tenant credit risk and future NOI and FFO could be impacted.

Unfortunately, they do not disclose unit-level financials, which would provide a picture into the trading health of their tenants. Other net lease REITs do report this metric for their tenants that are required to report this information. For example, 66% of FCPT’s ABR reports unit-level financials and EBITDAR / rent coverage was ~4.9x at Q4 2024.

The company’s ability to address this current set of tenant issues by re-leasing or re-investing asset sales will be an important test case to assess the company’s portfolio quality and underwriting process.

Management pursues growth over shareholder value and issues dilutive equity to fund acquisitions. While debt-funded acquisitions are cash flow accretive, equity issuance to fund acquisitions would be dilutive to both NAV and cash flow per share. Small REITs do need to grow to scale into their largely fixed G&A costs but doing so through dilutive equity issuance is a major red flag and can result in the company trading at a perpetual discount to NAV. There are many examples of this in small-cap REIT-world.

Summary

• Strategic review for sub-scale, externally-managed REIT listed in Canada but owns exclusively US apartments likely to result in M&A or liquidation.

• Class B/C garden-style apartments in Dallas - Fort Worth, Oklahoma City & Tulsa, and Cincinnati, average age of 40 years.

• At $8.25 per share, trades at an implied 8.3% cap and $92k per unit, a 25% discount to my liquidation value estimate of $11 per share (6.6% cap rate and $110k per unit).

• Portfolio sale or liquidation over the next 12 - 24 months combined with in-place 5% dividend yield results in 20% - 40% IRR.

• Next buyer gross IRR estimate of 15% with unheroic assumptions (no NOI growth in 2025, 3% thereafter, and no cap rate compression at exit) supported by falling supply in their markets and falling financing costs for apartments.

• External managers own 21.3% of the REIT units and combined with my assumption of an onerous, asset management break fee, incentivizes a sale netting them proceeds equivalents to ~10 years of management fees and costs.

Background

Dream Residential REIT is a small (US$170m market cap) REIT listed in Canada and externally managed by Dream Unlimited Corp and Pauls Capital. It was formed by the merger of American Workforce Housing L.P., a vehicle managed by Pauls Capital, and assets owned by Dream and IPO’d at US$13.00 in May 2022. Throughout this write up, all figures will be in USD despite the fact there are also units listed in CAD (DRR.UN).

This proved to be a very poor time to list a portfolio of Class B/C apartments in the sunbelt and mid-west due to the impact of rising interest rates and a significant wave of new apartment supply in the US. The shares have… not done well.

Source: Tikr

The original plan was to grow the portfolio through acquisitions. However, this immediately fell through due to high cost of debt (financing rates exceeded property cap rates for most of 2022 - 2024) and equity as the REIT traded at a deep discount to NAV and a high implied cap rate and dividend yield. As a result, the company has languished in value trap land as a sub-scale, externally managed REIT.

In combination with their 2024 annual results, the REIT announced the initiation of a strategic review in February to address the persistent discount between the REIT’s trading price and its net asset value per unit (based on 3rd party and management appraisals required under IFRS) as well as the Board and management’s view of the REIT’s intrinsic value. This announcement spurred the pop in the share price at the far right of the chart above. Subsequently, on March 11th, the REIT announced that the Board retained TD Securities as its financial advisor.

I think the Board and management have called time on this venture and the outcome of the strategic review will be a sale of the portfolio or an orderly liquidation.

Portfolio and valuation

Despite a ~25% rise in the share price year-to-date, I think the portfolio still trades at an attractive valuation and discount to its private market value.

Dream owns 15 Class B/C, garden apartment properties with 3,300 units across greater Dallas Fort Worth, greater Oklahoma City (includes Tulsa), and greater Cincinnati (includes Dayton, OH and Lexington, KY). Make no mistake about it - these are far from trophy assets. They are older properties (built in 1986 on average, so ~40 years old) that command lower rents (and as a result, lower NOI margins) and will require more maintenance CAPEX than new or Class A apartments.

Sources: Dream Residential REIT Q4 2024 Presentation

The portfolio’s weighting to Oklahoma City / Tulsa and Cincinnati / Dayton has helped performance through the current wave of high new apartment supply in the US sunbelt. These markets saw less of a rent spike during COVID than sunbelt markets like Dallas, Austin, Nashville, and Charlotte, which are now seeing large waves of supply in response. Monthly rents grew at ~3% in 2024 compared to remaining effectively flat in Dallas - Fort Worth.

Sources: Dream Residential REIT Q4 2024 Presentation

Cincinnati in particular did well with both new and renewal lease trade outs positive in Q4. This was supported by continued renovation spend in this market, which they halted in OKC and DFW due to returns falling below their target 12% - 16% threshold.

Sources: Dream Residential REIT Q4 2024 Presentation

At a share price of $8.25, the portfolio trades at an implied cap rate of 8.3% based on Q4 2024 NOI and $92k per unit. It screens cheap based on a 12.0x FFO multiple but assuming maintenance CAPEX at 20% of NOI results in a ~19x AFFO multiple, which is not cheap relative to the wider US multifamily listed peer set. The dividend, which yields ~5%, is just about covered by AFFO.

Despite the recent run-up in price, the portfolio still looks cheap relative to peers in the US and the private market.

The best two listed peers in my opinion are Nexpoint Residential Trust (NXRT, $1 bn market cap), which is also externally managed and focuses on Class B sunbelt apartments, and BRT Apartments (BRT, $340m market cap), which is internally managed but has its own governance issues and question marks and a similar market focus. The profile of both these portfolios is pretty similar to DRRs but a little higher quality. Monthly rents in Q4 2024 were $1,491 for NXRT and $1,405 for BRT and the average age of the BRT portfolio is 21 years (NXRT does not disclose this metric).

At $38 per share, NXRT trades at an implied cap rate of 6% and ~$190k per unit. BRT trades at $17.50 per share, reflecting a 7.2% implied cap rate and ~$130k per unit. Both pay a slightly higher dividend yield of 5.4% and 5.7% respectively but employ significantly higher leverage: ~12x net debt / EBITDA and 60% net debt / enterprise value for both.

I estimate that DRR’s portfolio is worth a ~6.5% cap rate and ~$115k per unit. I have assumed cap rates that reflect a spread over private market cap rates, which based on two sources range between 5.3% and 7.5%, to account for the age, quality, and location of the properties which I believe is in the below average but not terrible range.

These cap rates all reflect a significant discount to Class A apartments in the US, which are about 5% as evidenced by transactions across a range of both coastal and sunbelt markets.

Source: Bank of America Global Research

My property value estimate results in an estimated liquidation value per share of ~$11.00. I anticipate that any sale or liquidation will involve a cozy deal for the external manager, so I have assumed they get paid their current annual fee, undiscounted, for the remaining life of the management contract as a break fee. I have also assumed a 3% frictional sale cost reserve, each of which totals ~$0.50 per share or ~$1 per share in aggregate.

In conjunction with the ~5% dividend yield, based on my assumptions, a sale or liquidation over the next 12 - 24 months would represent a 20% - 40% IRR.

My property value estimate reflects a 5% discount to the IFRS “fair value” of the portfolio and my liquidation value estimate is a 18% discount to IFRS NAV per unit. This is based on a combination of third-party appraisals and management estimates. During Q4 2024, 6 properties representing 31% of the portfolio by fair value were externally appraised.

About half of the gap between my liquidation value and IFRS NAV per share is my assumed AM break fee and sale / frictional costs. Adjusting for those costs, if the IFRS fair values for the portfolio are achieved in a sale, this would represent liquidation value of $12.35 per share or ~12% upside to my estimate.

There are not a lot of good data points to handicap how conservatively or aggressively the portfolio is being appraised. There is only one minor transaction to point to, when in November 2023 Dream sold their only property in Wichita, KS for $9.0 million, which comprised 132 units built in 1983. The sale price was 3.3% higher than the IFRS “fair value” for the property in Q3 2023 and represented $68k per unit and a cap rate of “around 6%” on trailing twelve month NOI.

While far from representative of the rest of the portfolio due to its location and small size, it’s a positive sign that this sale was at a premium rather than discount to IFRS “fair value” and at a lower cap rate than I have assumed for the rest of the portfolio.

Why now?

Management taking real steps towards pursuing a sale or liquidation of the company creates a catalyst that makes this former value trap an interesting opportunity.

I also think the probability of a successful portfolio sale or a liquidation of the REIT through has increased as operating conditions show signs of improving this year and financing costs have declined.

Sources: Dream Residential REIT Q4 2024 Presentation, (1) CoStar

After peaking in 2024, new multifamily supply in Dream’s markets will fall through 2025 and 2026. This is virtually guaranteed based on starts and the fact that it takes about 2 years to deliver a new apartment building. New starts have fallen by ~50% from their peak in 2021 and remain at low levels, limiting supply 2+ years out. The CoStar forecast above for supply to start rising in H2 2026 and 2027 may prove to be too high unless we see a rebound in starts.

Sources: MMG Partners 2025 Forecasts

This year will remain challenging as newly-delivered supply leases up but a next buyer will be looking out to a period of potentially very low supply in 2026 and beyond, which would support rent and NOI growth.

After rising since 2021, financing costs for US multifamily have started to decline. This is particularly true when looking at the rates for multifamily agency mortgages, which are backed by a GSE like Fannie Mae or Freddie Mac. Multifamily is unique among commercial real estate sectors in having access to this type of mortgage, which supports the availability of debt financing, even in challenging environments. Rates peaked in Q4 2023 at 6% and fell by ~50 bps through 2024. The improving financing environment is further evidenced by rising LTV ratios, which exceeded 65% for multifamily loans for the first time since 2021 and the compression of spreads, which fell to below 160 bps in Q4 2024 (CBRE US Capital Markets Report).

I think a next buyer is looking at a ~15% 5-year gross IRR with a 7.7% initial cash on cash yield based decidedly unheroic assumptions: no NOI growth in 2025 and 3% thereafter, 6% cost of debt at 65% LTV, and no cap rate compression.

For simplicity I assumed a buyer can get interest-only financing but assumed a higher rate than seen in Q4 2024 for agency mortgages. The interest coverage ratio indicates that a buyer could get higher leverage than the 65% assumed here. Even if financing required 30-year principal amortization with the same 6% interest rate, the debt service coverage ratio would be 1.4x above typical lender requirements of 1.2x.

Management incentives

The REIT is externally managed by a ~50/50 JV of Pauls Capital and Dream Unlimited. The management agreement has an initial 10-year term through 2032 with a fee structure that doesn’t align them well with shareholders:

• An asset management fee equal to 0.25% of the valuation at IPO for the initial properties and purchase price of other properties.

• An incentive fee of 15% of FFO that exceeds $0.72 per unit, which increases annually by 50% of US CPI (they are not currently achieving this threshold).

• CAPEX fee of 5% of construction costs for projects in excess of $1,000.

• Acquisition fee of 1% of first $100k of properties acquired in a year, 0.75% of the next $100k and 0.50% in excess of $200k.

• Financing fee equal to actual expenses incurred.

There are no explicit provisions for termination in the event of a change of control for the manager or key personnel.

Based on the management contract alone, the manager has no real incentive to pursue a sale or liquidation and close the discount to NAV / liquidation value.

However, Dream and Pauls own 21.3% of the REIT units. Assuming a liquidation at my ~$11 per unit estimate, the value of their owned units would increase by ~$10.7 million. Adding in my punitive asset management break fee assumption, which represents another ~$9m, they stand to make about ~$20m in a liquidation, which represents ~10x the annual management fees and expense reimbursements they receive from the REIT. I can see how unlocking this value now could make sense as opposed to clipping the management fee coupon from a sub-scale REIT that’s unable to grow.

Risks, mitigants, and downside

Self-dealing by external manager. Pauls and Dream take the REIT private at a below-market price in order to continue to control and charge a management fee on the assets. The Board is not truly independent - out of 5 directors, one is Brian Pauls, CEO of the REIT and son of the founder of PaulsCorp / Pauls Capital and two are former management / current board members of other Dream-sponsored REITs. I think the mitigant here is the fact that this is the smallest of Dream’s externally managed REITs with their larger REITs, Dream Industrial and Dream Office, having enterprise values of CAD 6.3bn and CAD 1.6bn respectively. A self-dealing transaction could “taint” their other public vehicles, which are worth a lot more to Dream than this REIT, limiting their performance and future growth prospects.

Lower quality assets only attractive to high cost of capital buyers. The buyer pool for Class B/C properties may be thinner than I expect and my estimated cap rates may be too low. Based on the current share price, in place debt and my AM break fee and sale / frictional cost assumptions, if the portfolio is sold for less than $330m, which represents a 7.6% cap rate and $100k per unit, shareholders will lose money. I think the chances of this are remote.

Market conditions worsen, no deal is possible or assets can’t be sold. The two largest macro risks to a sale in the next 12 - 24 months would be either a recession that causes significant job losses in their markets, affecting demand for apartments, or a sharp rise in interest rates, which would increase financing costs and create uncertainty around market values. I don’t view this as likely but it’s possible and more likely to affect a sale of the whole company / portfolio than individual asset sales.

If the strategic review ends without a sale of the assets, the REIT will go back to trading based on dividend yield. Assuming no growth in the dividend in 2025, a 6% yield would result in a share price of $7 (~20% share price downside) and a 7% dividend yield would result in $6 per share (~30% share price downside). Dividends collected in 2025 would help offset this downside.

Source: Tikr

Importantly, DRR has no debt maturities in 2025 or 2026, which gives them a good runway in the event of an interest rate shock or economic downturn. Approximately $35m of debt ($20m of mortgage debt and their revolving credit facility with a $15m balance) matures in 2027. Their mortgage debt is fixed at a weighted average rate of 4.0% and the credit facility is floating rate at SOFR + 185 bps (~6.15% at current SOFR).

Summary

• European industrial / logistics REIT liquidating its portfolio after failing to find a portfolio buyer in strategic review that ended in May 2024.

• Capital markets environment has improved significantly since with falling rates and lower cost of debt capital reaching ~4% for European industrial / logistics.

• Blackstone and Brookfield both participated in separate ~€1 billion M&A transactions for European industrial / logistics portfolios in Q4 2024 at pricing of ~5% net initial yield.

• ASLI Shares trade at a ~15% discount to my estimate of net liquidation proceeds (based on a 5.1% net initial yield) for a 12% - 18% IRR assuming a 12-18 month wind-down timeline (20% - 30% IRR if properties are sold in-line with balance sheet valuations).

• Nine out of 25 properties in the market and manager is incentivized to liquidate portfolio efficiently and achieve sales proceeds in-line with balance sheet valuations due to revised fee structure.

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Background

ASLI is an externally-managed REIT listed in the UK, which exclusively owns industrial / logistics property in continental Europe. The trust went public in 2017 in a period in which interest rates were low and European logistics property fundamentals were strong. This positive environment intensified during COVID but then reversed as the rapid rise in interest rates in 2022 impacted property values and investor demand for commercial real estate.

Fast forward to late 2023, the business never really achieved scale, they were paying an uncovered dividend, leverage was rising, and they were trading at a perennial discount to NAV. The share price has fallen ~45% from June 2022. They announced a strategic review in November 2023, which concluded in May 2024, with them failing to find a buyer for the entire portfolio at a sufficiently attractive price but announcing a “managed wind-down” of the portfolio.

Their portfolio consists of 25 properties comprising 0.5 million square meters across 5 European countries with roughly a third in the Netherlands, a third in Spain, and the remainder in Poland, France, and Germany. The assets are predominantly new, well-leased (~95% occupied) with a weighted average unexpired lease term (WAULT) of 6.5 years (to first tenant break option).

Why does this opportunity exist (and why now)?

A small cap REIT that runs a strategic review and fails to find an acquiror for the entire portfolio should give an investor pause. Liquidating a portfolio asset-by-asset or in smaller sub-portfolios is a longer—and as a result, more costly—exercise for shareholders.

However, I can understand why this portfolio of assets might not be particularly attractive as a package and why, as management cited in the conclusion of the strategic review in May 2024, the “significant majority of interested parties” expressed a preference to acquire assets within certain geographies or individual assets. I also believe that the real estate capital markets environment has improved for European logistics and there have been key asset management initiatives that have improved the attractiveness of the assets to potential buyers.

1. Portfolio is a “mixed bag” of geographies and logistics real estate product types. It’s about evenly split between more stable Western European markets (Netherlands, France, Germany) and emerging Southern and Eastern European markets (Spain, Poland). It is a mix of mid-box regional logistics and urban logistics properties, multi and single-let, and uses, from cross-docked parcel terminals to climate controlled food storage.

   

2. European rates and cost of debt capital for real estate has fallen. Long-term European government yields fell at the end of 2023 when the strategic review was announced (review period in the red box above) but proceeded to rise through the review process. They’ve since fallen to new lows. Rate cuts by the ECB and market expectations for yields has also resulted in lower borrowing base rates with 5-year EURIBOR swaps falling ~25bps year-on-year to ~2.3% today. Loan margins for core logistics real estate have also compressed from ~180 in 2024 to ~160 bps today putting all-in cost of debt for good quality European logistics real estate at around 4%.

   1. Another data point on the falling cost of capital in Europe, while not specific to real estate, is that the high-yield bond index—which represents a similar-ish yield alternative to commercial real estate—has fallen about 100bps from 6.00% - 6.25% during the review period to 5.00%-5.25% today.

3. Significant progress has been made leasing up space vacated by a tenant that went into administration at their largest asset (which comprises 7 properties) in Madrid. Arrival, an electric vehicle manufacturer, occupied three units totaling 27,165 square meters, was in financial difficulty, and ceased paying rent in late 2023. ASLI negotiated a surrender of the lease in February 2024. One of the units (~20% of the space) was let during the strategic review process to a new occupier but since the end the process, they have upsized an existing tenant at the property to take 16,500 square meters (previously occupied 7,718 square meters) and backfilled the space they formerly occupied to a new tenant. Two units at the property remain vacant - a 5,534 square meter unit vacated by Arrival and a larger, 11,264 square meter unit vacated by Amazon in August 2023 (Amazon also occupy the largest unit at the property on a long-term lease with WAULT in excess of 12 years).

European logistics real estate M&A activity in H2 2024 supports improving environment

In September 2024, Blackstone acquired an 80% interest in a pan-European industrial / logistics portfolio owned by Burstone. The recapitalization of this portfolio was motivated by upcoming debt maturities in 2025 and Burstone’s desire to transition to towards a less capital intensive / asset-light business model.

The portfolio is similar to ASLI’s albeit with a larger weighting to Germany. As of September 2024, occupancy was ~97% and the WAULT was 4.9 years. The nature of the transaction, in which an LP interest is sold and Burstone remain as JV partner and GP, charging a management fee, likely means the trade was at a discount to what the portfolio would sell for on a free and clear basis.

The transaction valued the 32-property portfolio at €1.0 billion or €910 per square meter, a 3.1% discount to their balance sheet valuation (which was based on a weighted average 5.1% cap rate). The portfolio generated net property income of €26.4m in the 6 months to September 2024, which represents a 5.2% cap rate on the implied transaction value or a 4.9% net initial yield if purchase costs of 5.5% are assumed (typical for European property valuations).

In November 2024, Brookfield acquired Tritax Eurobox in an all-cash offer, beating out a competing, share-based offer from Segro PLC. This was a larger, also externally-managed REIT listed in the UK that owned European logistics properties and faced similar difficulties to ASLI - trading at a discount to NAV with elevated leverage.

The portfolio is focused on newer, large “big box” properties, predominantly in Germany, the Netherlands, and Belgium (~60% of the portfolio). The WAULT to expiry is 9.5 years but 7.8 years to first tenant break option. Due to the larger size of the properties, one would expect them to sell for a lower price on a per square meter basis.

The transaction valued Tritax Eurobox’s 21-property portfolio at €1.3 billion or €880 per square meter, a 10% discount to the balance sheet valuation of their portfolio in March 2024 (based on a weighted average 4.65% net initial yield). The purchase price reflected a 5.1% net initial yield.

Brookfield subsequently agreed to sell 6 of the properties to underbidder Segro. These properties are located in Germany and the Netherlands and were sold for €470m or €1,275 per square meter at a 4.7% net initial yield. This implies pricing of 5.3% NIY and €750 per square meter for the remaining portfolio, now ~30% Germany and Belgium and ~70% in Spain, Italy, Sweden, and Poland.

Valuation and potential liquidation proceeds

Based on a current share price of £0.57, which is equivalent to €0.68 (share price and FX rate as of Jan 23, 2025), ASLI’s market capitalization is ~€280m and enterprise value is €500m adding debt of ~€250m and cash of ~€30m. With net rental income of €14.3m in H1 (€28.6m annualized), this implies a net initial yield of 5.4% and €970 per square meter for their portfolio. Adjusting for non-recurring strategic review costs of €1.5m in H1, annualized funds from operation are €17.4m resulting in a 16.0x price / FFO multiple.

Taking into account leasing activity and inflation-linked rent increases post period end, I estimate that the portfolio generates an annualized net rental income of €30.6m. Applying a weighted average net initial yield of 5.1% and assuming 5.7% purchase costs (in line with those assumed for their balance sheet valuations) results in a market value for the portfolio of €570m, which reflects €1,100 per square meter. These valuation metrics are in-line with the recent Blackstone / Burstone and Brookfield / Tritax Eurobox transactions.

My market value estimate is an 8% discount to the balance sheet valuation of the portfolio (excluding the wind-down costs) of ~€620m. The majority of the discount is attributable to their portfolio in Spain, where I have a less optimistic view on asset values and logistics fundamentals. My valuations of their French and Polish assets are also more conservative.

Deducting debt of €250m, wind-down costs, which include the agree disposal fee structure for the manager, and accounting for cash and other assets / liabilities indicates a net asset value / liquidation value of €330m or €0.80 per share. This reflects a discount to balance sheet net asset value (which is €0.876 including wind-down costs) of -9%.

My market value estimate for the properties reflects a 15% discount to their original purchase price, which might not seem like all that much given the significant recent move in rates and property values. Looking at their pre-COVID acquisitions (2018-2020), I think values are broadly up, due to rental growth and broadly similar net initial yields. I see market values being 20% - 40% below their purchase prices for assets in 2021 and 2022, where in retrospect, they clearly overpaid (by a lot).

Green Street’s Pan-European CPPI report broadly supports this price evolution over time with current industrial values down ~20% from their peak in 2022 but higher than the 2018-2020 period.

Potential proceeds and timeline

My NAV estimate indicates ~18% upside from the current share price. At the conclusion of the strategic review process, management indicated that they believe the majority of the assets can be disposed of in 2025. The Q3 2024 update in November 2024 indicated they have commenced sales processes for 6 assets and in advanced stages of 3 of those, with LOIs anticipated to be signed “shortly”. Sales processes for a further 3 assets were to commence in January, which would mean that 9 of their 25 properties are in the market.

I think a 12-18 month timeframe from here is a realistic target. This would result in a 12%-18% IRR based on my net asset value estimate, with upside from retained cash flow prior to assets being sold - currently about €0.01 per share per quarter or ~1.5% of the current share price. If they are able to sell the portfolio in line with their balance sheet valuations, this would result in a 20% - 30% IRR over 12-18 months.

As part of the managed wind-down, the investment management agreement was revised to lower the asset management fee to 50 bps of NAV (from 75 bps) and adds a disposal fee. The disposal fee is 65 bps of net disposal proceeds payable in two installment: an initial payment once 80% of the portfolio value of as of March 2024 is sold, and the remainder once 100% of the properties have been sold.

The manager will also receive a conditional disposal fee of 5 bps if aggregate gross sales values is at least 95% of the March 2024 portfolio value and 10 bps if net disposal proceeds exceed the March 2024 portfolio value. The March 2024 portfolio value was €602.7m, which reflects a slight discount to current balance sheet valuation (after deducting the assumed wind-down costs) and a ~5% premium to my market value estimate.

This fee structure isn’t perfect but it does a reasonable job of aligning incentives and motivate the manager to sell the portfolio quickly but not at firesale prices.

• European industrial / logistics (I&L) real estate has repriced after a period of rapid capital value growth during the COVID / low interest rate era.

• Current values are sustainable due to accretive debt, institutional weight of capital, and an improving fundamentals outlook.

• These conditions are not necessarily found in the US / UK I&L markets, where debt is not accretive and current valuations are reliant on expectations around rent mark to market and rental growth.

• European I&L will represent an attractive pool to fish in for private and public real estate investors in 2025.

Expectations / predictions

• European I&L investment volume to exceed €40bn in 2025 (higher than 2023/24e and pre-pandemic 2017-19 period) (CBRE)

• European average I&L yields to fall to 5% or below by YE 2025 (Savills)

• European I&L values will increase by 5% - 10% (Green Street CPPI)

Background and hypothesis

European industrial / logistics real estate has suffered a major reversal in fortunes. The property type was a darling of the pandemic era as rents grew sharply - buoyed by demand due to the spike in e-commerce adoption and the need to strengthen supply chains - and yields fell to record lows due to investor demand and very low interest rates. Industrial / logistics real estate values rose by 40% from the start of the pandemic before peaking in 2022.

However, since their 2022 peak, values have since fallen by 20% - 25%. Values fell rapidly in late 2022 and early 2023, and more slowly through the remainder of 2023. Values have largely been stable in 2024, raising the question of whether the sector has sufficiently repriced and whether the next leg for values is likely to be up or down.

This rollercoaster has been even more pronounced for European Industrial REITs given the levered nature of their portfolios. The share prices of Sagax, Segro and WDP (three of the largest European industrial REITs) have fallen 25%, 48%, and 51% over the past three years, despite growing earnings per share over the same period by 51%, 17%, and 29% respectively.

Three key factors precipitated European Industrial / Logistics real estate’s fall from grace:

1. The rapid rise in interest rates in response to inflation, which increased the cost of equity and debt capital for real estate significantly,

2. A development boom in industrial / logistics supply in response to the rapid rise in values and low vacancy rates during the pandemic era, and;

3. A slowdown in demand for space due to the aftereffects of the pull-forward in leasing during the pandemic and slowing economic growth / increased economic uncertainty across European markets.

While uncertainty remains around the trajectory of economic growth in the Eurozone and (as a result) occupier demand, I believe European industrial / logistics has now repriced to a sustainable level. Further yield expansion for the sector is unlikely, which is not necessarily the case for either the UK or the US, making this sector an interesting hunting group for public and private real estate investors.

European industrial / logistics real estate yields appear to have stabilized around 5.25%. Yields expanded approximately 100 bps in 2022 and 50 bps in 2023 but have remained largely flat in 2024 across most European markets.

Prime industrial / logistics yields for select European markets

These prime industrial / logistics yields represent an attractive spread of ~235 bps to government bond yields (~2.9% as of October 2024 for 10-year Euro Area government bond yields; 19 countries) and to high-yield corporate bonds, which yield ~5.0% (as of 11 December 2024).

The cost of debt for industrial / logistics real estate has benefited from falling base rates and margins and is available and accretive. Rate cuts by the ECB have resulted in lower base rates, with EURIBOR falling from approximately 4% in December 2023 to just under 3% as 2024 comes to a close. EURIBOR swaps for 5- and 10-year terms are approximately 2%. Loan margins have also declined in Europe for the real estate sectors viewed as having solid fundamentals. Margins for industrial / logistics loans had been c. 180 bps throughout 2023 have begun to fall, reaching 160 bps in Q3 2024.

As a result, all-in financing rates for core industrial / logistics real estate in Europe is approximately 3.6%. While approximate and dependent on the property, sponsor, and LTV, this is in-line with a recent unsecured bond offering by Segro for €500m with an 8-year term at 3.5%.

Accretive financing provides support to current prime property yields as a core property acquired at a 5.25% yield with 50% LTV debt at a 3.60% interest rate and assuming an asset management fee of 80 bps on equity would generate a cash on cash yield of 6% before accounting for future rental growth through fixed uplifts or indexation.^.

Industrial / logistics real estate is one of the few sectors deemed “investable” in Europe by institutional investors where capital can be deployed at scale. Out of the four main “food groups”, both office and retail continue to face cyclical and “existential” risks that make the trajectory of rents and occupancy difficult to predict. Residential has repriced but absolute yields remain low, below 4% across most European markets, making it unattractive versus other yield alternatives. Investors seek exposure to alternative sectors - data centers, healthcare, and self-storage among others - but these are small and deploying capital at scale is challenging. Industrial offers institutions an attractive yield, reasonably predictable fundamentals, and the narratives of e-commerce and global supply chain resiliency as structural demand drivers. Capital flows into industrial are likely to accelerate in 2025 vs. recent years and support yields.

Vacancy rates have risen over the past several years but may be stabilizing. The region’s vacancy rate for the region has increased to ~6% from ~3% since 2022 and are now broadly in-line with 2017 levels. Southern and Eastern European markets have seen the largest increase in vacancy rates, largely due to the greater supply pipelines in those markets in recent years.

Industrial / logistics vacancy rates for select European markets

Current vacancy rates are compatible with continued rental growth. Rents have continued to rise since 2022 despite the rise in vacancy rates, albeit this has been at a slower pace than seen from 2020 - 2022.

Prime logistics headline rent indices by market (Q2 2019 = 100)

The supply pipeline is shrinking rapidly. Industrial / logistics space under construction has fallen by 25% - 30% since peaking in 2022. Construction and financing costs have risen faster than rents, which along with uncertain demand, and increasing regulatory barriers for new, “greenfield” development in many European markets, have limited development starts. Absent a significant rise in rent or fall in property values / yields, development is expected to remain limited.

Industrial / logistics space under active construction, Europe (Colliers)

Expectations and predictions

I expect investor sentiment to shift from negative / neutral for European Industrial / Logistics to neutral / positive and repriced values and accretive pricing will fill the bid-ask spread between buyer and sellers. As a result, I anticipate that investment volumes in 2025 will exceed €40 bn (based on CBRE figures), which would be ahead of both recent years (2023 & 2024e) and the pre-COVID average (2017-19).

Industrial / logistics yields are more likely to fall than to rise in 2025 (based on the Savills EMEA average) and I’d guess that they end up below 5% by YE 2025.

With a marginal decline in yields and ~3% market rental growth, I anticipate industrial / logistics capital values will increase by 5% - 10% in 2025 based on the Green Street CPPI (by Sep ‘25, local currency index value = 160 at Sep ‘24)

• Small and illiquid (~$100m market cap, ~60% owned by two funds) hospitality REIT that owns a portfolio of 15 select service upper midscale and upscale properties in secondary US markets.

• Condor had agreed to be acquired by Nexpoint Hospitality Trust in July 2019 for $318m ($11.10 per share at the time). That deal, however, was postponed and eventually terminated in September 2020 due to COVID.

• In June 2021, Condor announced they were evaluating strategic alternatives and on September 23, they announced that they had entered into an agreement with an affiliate of Blackstone to sell its portfolio for $305m, which is expected to occur in Q4 2021.

Despite a significant ~20% increase in the stock price since the announcement of the transaction, Condor continues to trade at a 6% - 12% discount to management’s estimate net proceeds per share. At the net proceeds midpoint of $7.60 per share, this opportunity could generate a 10% total return and 15% - 25% IRR. Risk seems limited by the fact that Condor has sufficient shareholder approval for the deal and their counterparty is Blackstone with a targeted close in Q4 2021.

The sale price of $305m represents ~$160k a key, a ~12x multiple of 2019 EBITDA and a 7.65% cap rate on 2019 NOI (assuming a CAPEX reserve of 4% of revenue). I don’t have any unique insight into the deal and whether it represents good value or not but would appear to be a pretty good result for shareholders as not that far off the original terms in 2019 even though operating performance has not yet returned to 2019 levels.

The stock traded up on the news of the sale from ~$5.65 per share on September 22nd to close at $6.15 on the 23rd. After the close, Condor released an 8-K with more information around the sale and plan of liquidation and at the close on the 24th the stock trades at approximately $6.90.

Based on Condor’s Q2 2021 financials, I estimate NAV / liquidation value of ~$7.40 per share, which assumes:

• Share count increased by the 2.7m shares issues to redeem the Series E preferred shares subsequent to Q2 2021 and that 4m shares will be issued to redeem the 2020 convertible debt (18.8m diluted shares).

• The land option liability of $8.5m, which is associated with Aloft Atlanta property and allows the party Condor purchased the asset from to acquire the surface parking lot north of the hotel, is transferred to Blackstone and is factored into the $305m purchase price.

Condor provided some additional detail around the transaction and their proposed plan of liquidation for the REIT in their 8-K released the night of the 23rd. Blackstone has put up a $15m deposit, the transaction is subject to a vote of 50% of Condor’s shareholders, and while Condor has agreed to not solicit alternative proposals, they are not precluded from providing information to an unsolicited bidder. There is a termination fee of $5m payable to Blackstone if Condor go with a competing bidder. Shareholders representing just over 60% of the Common Shares Outstanding (Real Estate Strategies and Stepstone Real Estate being the major shareholders) have committed to vote for the sale.

Simultaneously, Condor’s Board has approved a Plan of Liquidation, and in the 8-K, they estimate total distributions of $7.35 to $7.85 per share with a distribution once the sale to Blackstone is completed with some of the sale proceeds retained to settle liabilities / winding up expenses and to be distributed in a liquidation distribution within 24 months.

This opportunity could return 10% (a 1.1x MOIC) based on the midpoint of management’s net proceeds estimate of $7.60 per share. Given the deal is expected to close in Q4, the IRR could be higher but depends on the quantum of the initial distribution and timing of the final, liquidating distribution. If the initial distribution represents 70% - 80% of the total estimate net proceeds and and liquidating distribution is within 18 months of shareholder approval for the plan of liquidation, this could result in an IRR of 16% - 25%.

This is far from a sure thing as frictional costs could be higher than management have estimated. Condor was effectively operational cash flow neutral in Q2 2021 and as broadly, US Hotel performance has improved in Q3 vs. Q2, the business may have generated some additional cash that would provide a buffer against an underestimate of the costs of liquidation.

It’s also not impossible that another bidder emerges for the business. I wouldn’t build this into my base case but Nexpoint Hospitality has a history with the assets and Highgate Hotels, which acquired Colony’s hotel portfolio, had a confidentiality agreement in place with Condor to do DD earlier in the year.

Having managed to pick up a small position at ~$6.15 prior to the 8-K coming out on the 23rd, the spread here looks wide enough to remain attractive. I intend to add to this position (while keeping it as a <5% position in the portfolio) if I can pick up additional shares below $6.85 per share, which is a 10% discount to the midpoint / ~7% discount to low estimate of net proceeds. This is obviously slightly lower than where the stock trades today and while a 10% discount is basically arbitrary, it seems like as good a line in the sand as any to pick (although I may regret this insistence on a ~1% lower price later - to be determined).

Disclaimer & Disclosure

This publication is NOT investment advice and the author is not an investment advisor.

All content on this website and in the newsletter, and all other communication and correspondence from its author, is for informational and educational purposes only and should not in any circumstances, whether express or implied, be considered to be advice of an investment, legal or any other nature.  Please carry out your own research and due diligence.

The author holds shares of Condor Hospitality Trust, Inc. and may hold any securities mentioned on this blog and may buy or sell these securities at any time.