If we step back from the indexes and look at our two major market sectors—banks and real estate—we see a certain picture emerging. Most of the assumed “facts” surrounding both industries have been smoke, mirrors, and hype. One Real Estate Investment Trust (REIT) worth looking at is Highwoods Properties (HIW), explains Tim Melvin, editor of The 20% Letter.
If you believe the headlines, while Artificial Intelligence (AI) is saving the world and making investors, and most especially stock options traders, richer than anyone has ever been before, commercial real estate (CRE) will be killing everyone else—especially the banking industry.
Apparently, all the commercial real estate loans held by banks will default sooner rather than later. Collapse is all but guaranteed.
But how risky is CRE in reality? Moody’s (MCO) is one of the leading credit agencies, and it doesn’t foresee a looming catastrophe. Unless, of course, you have financed lots of office properties that will be negatively impacted by employees working from home, you should be fine.
Most of the banks I’ve targeted have below-average commercial real estate exposure and even lower exposure to central business district office properties. Plus, the only office REIT I’ve highlighted – HIW – owns properties in the Sunbelt region, which have an 89% occupancy rate.
Again, Highwoods owns office properties in the strongest markets in the United States. These cities have growing populations and above-average incomes. They are the cities everyone is moving to in order to escape taxes and weather.
Highwoods shares are trading at about a 25% discount to my net asset value calculation and yielded more than 8% at their recent price. Continued improvement in operating cash flows due to demographic changes and demand should increase the shares’ net asset value dramatically.
Recommended Action: Buy HIW.