The transition from fossil fuels to renewable energy—a core theme in values-based portfolios for almost two decades—has been catapulted from a niche investment theme to the mainstream thanks to the passage of the most significant climate action legislation on record.
The Inflation Reduction Act (IRA), passed in August, is a profound inflection point in the evolution of climate policy that puts U.S. muscle behind the global push toward carbon-reduction goals. The bill, which dedicates $369 billion to climate provisions, is likely to elevate investor confidence in the clean-energy theme and open the door to new investment opportunities.
“The IRA will provide a huge boost to companies and projects, both proven and emerging, that enable decarbonization at scale,” says Justina Lai, chief impact officer at Wetherby Asset Management in San Francisco. “It provides much more policy certainty to companies and funds already investing in the energy transition and incentivizes laggards to catch up.”
The new legislation requires all emissions-producing sectors, such as transportation, agriculture, construction, and utilities, to reduce greenhouse gases, and provides a host of tax incentives to companies and individuals to make environmentally friendly choices, such as buying an electric vehicle and installing solar panels.
Lai expects more innovation in renewable energy, energy efficiency, electric vehicles, and batteries, along with nascent technologies in areas such as green hydrogen, direct air capture, carbon capture and storage, energy storage, and sustainable fuels.
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A goal to have net-zero carbon emissions by 2050—an agreed-upon target by many nations and the global scientific community—isn’t just a technology investment story. The carbon-reduction theme is intersecting with agriculture, construction, transportation, finance, and other industries.
In Kent, England, InspiraFarms creates modular cold rooms and packing-houses for agricultural use to reduce reliance on diesel generators and reduce food waste. Berlin-based Betteries upcycles electric-vehicle batteries and incorporates them in clean-power systems. In Lexington, Ky., Rubicon has developed software to help waste-management companies, businesses, and municipalities reduce carbon emissions.
“This is about investing across the entire value chain of this transition,” says Ian Schaeffer, global market strategist at J.P. Morgan Private Bank.
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While a major area of innovation is in slowing climate change, another is in addressing the needs of communities already struggling with the impact of rising global temperatures.
Source Global, a Scottsdale, Ariz., start-up, creates new solar-powered technology that extracts water vapor out of the air to make drinking water, eliminating the need for fossil-fuel-dependent methods for delivering drinking water to communities whose water supply is drying up due to climate changes.
“The beauty of the Inflation Reduction Act is that it opens the door to climate adaptation in underserved communities. That creates massive opportunity,” says Cody Friesen, Source’s founder and CEO.
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J.P. Morgan’s Schaeffer says investors should be looking toward the primary enablers of the transition to clean energy, and points to two important themes: green buildings and semiconductors.
“Buildings account for a staggering amount of carbon emissions,” he says. “We think there’s opportunity in sustainable construction materials, efficient air systems, incorporating smart systems, and digital infrastructure.”
Semiconductors are essential to modern technology and will play a big role in the transition of the automotive industry from internal combustion engines to electric vehicles, Schaeffer says. “This will require more powerful and efficient semiconductors. The demand for these will skyrocket in coming years.”
Opportunities are global in scope, and suited for long-term investors, he says. “This transition will be a long and bumpy but ultimately inevitable process likely to take us through the middle half of this century.”
This article appears in the March 2023 issue of Penta magazine.
As small banks batten-down their hatches, many will steer clear of commercial real estate loans. That could create opportunities for mortgage trusts that invest in such loans, including
(ticker: STWD) and
(BXMT).
The real estate investment trusts that hold commercial property loans have had their own challenges, with office and retail vacancies, but the best-managed of these REITs are comfortably covering their dividend payouts. And after 20% to 40% drops in their stocks over the past year, their dividend yields generally exceed 10%.
With Starwood at a recent $17.60, and Blackstone at $18.50, the stocks are trading at discounts to their book values of 10% and 20%, respectively, notes BTIG analyst Eric Hagen. Their dividends are more reliable than many peers, so today’s market dislocations make these REIT stocks attractive.
“That’s when you can really make money in these stocks,” Hagen tells Barron’s. “You can clip the dividend and get some valuation improvement on top of it.”
The current banking crunch is reminiscent of the era when commercial mortgage REITs came into existence, 15 years ago, to fill a void left by the 2008 financial crisis. Today, the trusts hold loans across property types that range across multifamily housing, offices, hotels, and retail.
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Mortgage REITs originate or buy loans that are secured by commercial properties, in the way that a home mortgage is secured by a house. Compared with deposit-funded banks, the mortgage REITs have better matched assets and liabilities, because they fund loans with capital from issuing stock and debt. Since their loans are well-secured, the mortgage REIT stocks fared better in the post-Covid real estate shake-up than shares of office-owning equity REITs like
(BXP) and Vornado Realty Trust (VNO).
The real estate crunch and rising rates affected some borrowers of the mortgage REITs, so the group’s reported earnings in 2022 were dinged by reserves taken under a conservative accounting standard that began in 2020.
Earnings at Blackstone Mortgage Trust last year were $1.46 a share after reserves, but $2.87 a share before such noncash charges. Even in the challenging December quarter, the REIT’s cash earnings of 80 cents a share comfortably covered its 62 cent dividend.
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Starwood Property Trust’s cash earnings in 2022 were $2.28 a share. As it originates new loans, the REIT has reduced the portion of its portfolio that’s collateralized by retail and office buildings, and increased multifamily and industrial properties.
The REIT benefited from rising rates because its loans all have floating rates, said chief executive Barry Sternlicht on the earnings call this month. “We can earn our dividend doing almost nothing,” he told listeners. “But it’s primarily because the floating rate book is carrying the firm.”
With banks on the sidelines, the lending environment is one of the best that Starwood has seen in its 12 year existence, said Sternlicht. Starwood is playing defense, for now, by fortifying its balance sheet. But when its shares rise back to book value, Sternlicht said his firm can raise capital and make “extraordinary” loans.
Analyst Hagen expects that the stresses in commercial real estate are not done. But much of that risk has been discounted in the prices of REIT stocks, he says. Along with the Starwood and Blackstone REITs, the BTIG analyst recommends the shares of
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(LADR), whose niche in midmarket loans below $50 million is where regional banks will likely pull back. At a recent $9.50, Ladder trades at a 17% discount to book value and sports a 9% dividend yield.
“Bank stress may yet intensify,” says Hagan, “but that doesn’t change how we feel about the longer term.”
Write to Bill Alpert at william.alpert@barrons.com
Banking sector jitters and higher interest rates likely spell trouble for the roughly $5.5 trillion U.S. commercial real estate debt market.
The banking sector has been in the crosshairs of jittery investors since Silicon Valley Bank’s collapse in mid-March after it sold a portfolio of rate-sensitive “safe” securities at a loss, sparking a run on the bank by fearful depositors.
Since then, a subsidiary of New York Community Bancorp
NYCB
snapped up assets and liabilities from the failed Signature Bank
SBNY
at a 17% discount. However, the deal didn’t include its commercial real-estate portfolio, according to Barclays researchers, who viewed the development as “a negative” for commercial real estate, as the portfolio likely would have sold at a discount.
Another regional lender, First Republic Bank,
FRC
has been in the spotlight too, after it received a historic $30 billion injection in deposits from big American banks to shore up confidence in smaller banks. Its shares were up more than 50% on Tuesday, but still were down 84% on the year to date, according to FactSet.
“I don’t think it’s going to be a repeat of the 90s,” said Michael Thom, a partner at law firm Obermayer, referring to the boom and bust cycle in U.S. commercial real estate that led to a wave of bank failures.
But Thom does see landlords already having a tougher time getting new loans, especially on half-empty office buildings due to flexible work arrangements.
Here’s a look at 3 charts that highlight key areas of worry for commercial real estate and where debt tied to these properties reside in the U.S. banking system and beyond.
Who holds the risk?
Multifamily properties has been a “favored” property asset class in the wake of the global financial crisis, after a foreclosure wave hit underwater homeowners and boosted demand for rentals.
Since that time, the federal government has come to own nearly half of the $2 trillion multifamily loan pie (see chart), according to Deutsche Bank research. Banks own almost half of the exposure to the rest of the $3.5 trillion in commercial property debt market.
Related: Be cautious of floating-rate commercial real estate debt, says Barclays
Deutsche Bank researchers led by Ed Reardon noted that commercial property prices dropped by 21% during the global financial crisis.
While it’s unclear how this cycle will play out, the Deutsche Bank team pointed to recent Fed stress tests of big banks that projected $75 billion in commercial real estate losses, at a 9.8% stressed loss rate.
The Green Street Commercial Property Index pegged U.S. property values as down 15% in March from a year before.
Watch small U.S. banks
Small banks have become key players in commercial real estate over the past two decades. Their share of the loan pie among all banks rose to almost 68% in January, up from 52% 18 years ago, according to recent tally from Apollo Global Management.
What’s more, small banks grew lending in the sector by nearly 20% in March from a year before (see chart) as the Fed was rapidly increasing interest rates. Large banks increased their exposure by only about 5%.
Office albatross?
While small banks often keep commercial real-estate loans on their books, Wall Street often looks to package larger loans on skyscrapers, office towers and other property types into bond deals.
In good times, loan payments are passed onto investors in the bond deals. But when credit issues, late payments or defaults arise, it’s a bondholder problem. That’s the roughly $670 billion commercial mortgage-backed securities (CMBS) market in a nutshell.
Financing through the CMBS market has been a key way for many trophy office buildings in New York, San Francisco and other big U.S. cities to receive funding in recent decades.
Office properties, once considered a relatively safe investment, aren’t viewed the same way any longer, particularly with Kastle Systems’ gauging office vacancy in its 10-city barometer at only 47.3% as of March 20.
Shares of office REITs, or real-estate investment trusts, have plunged 51% over the past 12 months, according to Morgan Stanley researchers. That compares with a 23% drop for the Dow Jones Equity REIT Index
DJDBK
for the same stretch.
The concern with hybrid work is that tenants won’t need as much office space as in the past, which could drag down property prices and hurt landlords with billions of debt coming due in the next few years, likely at higher rates.
While some borrowers will get loan extensions or modifications, a “more expensive funding regime” could force others to “hand back the keys,” said BofA Global’s Alan Todd, who leads the bank’s CMBS research effort, in a recent client note.
To help gauge borrower costs, the average coupon for office loans in multi-borrower, or “conduit,” commercial mortgage bond deals has almost doubled to 6.3% since 2021.
Against this backdrop, Todd at BofA expects new CMBS issuance to finance buildings of only about $50 billion this year, or roughly half the volume of 2022.
Published: March 20, 2023 at 4:34 a.m. ET
By Elena Vardon
Dolphin Capital Investors Ltd. on Monday said it has removed director Miltos Kambourides with immediate effect after claiming a breach of contract.
The investor in high-end resort developments in the eastern Mediterranean also said its investment management agreement with Dolphin Capital Partners Ltd. (DCP) has been terminated…
By Elena Vardon
Dolphin Capital Investors Ltd. on Monday said it has removed director Miltos Kambourides with immediate effect after claiming a breach of contract.
The investor in high-end resort developments in the eastern Mediterranean also said its investment management agreement with Dolphin Capital Partners Ltd. (DCP) has been terminated with immediate effect.
Mr Kambourides is the founder and Managing Partner of DCP.
The London-listed group said DCP entered into an undisclosed option agreement with the purchaser of the Amanzoe resort in Porto Heli in Greece at the same time that it sold its interest in the resort in 2018. The failure to disclose the existence of this agreement at the time–which entitled DCP to buy an extra 15% of the special purpose vehicle holding the resort–constitutes a breach, Dolphin Capital Investors said.
The company said it would seek to pursue all legal options to recover the value from the undisclosed option agreement, which it says is its property. It added the value could be material given the size of the company but not enough information is available to put a number on it.
Nicolai Huls and Nick Paris have been named executive and managing directors with immediate effect and the company doesn’t intend to appoint a new investment manager, it said.
Mr Kambourides didn’t immediately respond to a request for comment.
Write to Elena Vardon at elena.vardon@wsj.com
Published: March 16, 2023 at 5:07 a.m. ET
By Joe Hoppe
Ediston Property Investment Co. said Thursday that it is undertaking a strategic review of options available to maximize shareholder value, including a preference for a merger with one or more other real estate investment trusts.
The investment trust said while a merger would be its preference, it will consider all options, including…
By Joe Hoppe
Ediston Property Investment Co. said Thursday that it is undertaking a strategic review of options available to maximize shareholder value, including a preference for a merger with one or more other real estate investment trusts.
The investment trust said while a merger would be its preference, it will consider all options, including selling the entire issued share capital of the company under a formal sales process, undertaking some other form of consolidation or combination, and selling the portfolio or subsidiaries and returning money to shareholders.
The company said while it was well positioned from an investment perspective, it was undertaking the review as it believes it remains of a size that might deter potential investors, and its share price–while better than many peers–reflects a material discount to its net asset value.
As a result, it doesn’t expect to be able to raise new capital in the short or medium-term despite growing the company being a stated objective. It believes a consolidation would best address challenges so shareholders can enjoy greater economies of scale and enhanced liquidity.
There can be no guarantee any changes will result from the review, the company said.
Shares at 0903 GMT were up 3.8 pence, or 6.2% at 65.0 pence.
Write to Joe Hoppe at joseph.hoppe@wsj.com
Published: March 15, 2023 at 1:48 p.m. ET
By Adriano Marchese
True North Commercial Real Estate Investment Trust’s shares plummeted Wednesday after the company said it will slash its distribution to unitholders by 50% due to higher inflation and rising interest rates.
Shares declined 39% to 3.55 Canadian dollars ($2.59) at 1:39 p.m. ET.
After…
By Adriano Marchese
True North Commercial Real Estate Investment Trust’s shares plummeted Wednesday after the company said it will slash its distribution to unitholders by 50% due to higher inflation and rising interest rates.
Shares declined 39% to 3.55 Canadian dollars ($2.59) at 1:39 p.m. ET.
After markets closed Tuesday, the Canadian REIT said it has faced challenges due to changing office requirements following the pandemic. The company cut its annual cash dividend to C$0.297 per unit, and said the board would reevaluate its distribution policy on a regular basis.
“This decision underlines the board’s and management’s view that the unitholders are best served by a well-capitalized REIT, which bolsters the REIT’s ability to enhance its portfolio and pursue value-creating opportunities,” it said.
True North said the distribution cut reduction is expected to provide it with more financial flexibility to meet its short- and long-term objectives.
Additionally, the company said it has agreed to sell two office properties in Toronto and Ottawa for C$24.8 million, providing it with C$5 million of excess sale proceeds.
Write to Adriano Marchese at adriano.marchese@wsj.com
SL Green Realty Corp. (SLG) , an integrated real estate investment trust, or REIT, is Manhattan’s largest office landlord. The stock has been under selling pressure so let’s check out the condition of the charts and indicators.
In the daily bar chart of SLG, below, I can see that the stock has lost a lot of ground the past 12 months. Share prices are in a longer-term downward trend and trade below the declining 50-day moving average line and the declining 200-day moving average line.
The trading volume has increased on the decline and tells me that traders and investors are voting with their feet. The On-Balance-Volume (OBV) line has made a new low for its long move down and tells me that sellers of SLG are more aggressive than buyers. The Moving Average Convergence Divergence (MACD) oscillator is bearish.
In the weekly Japanese candlestick chart of SLG, below, I see a bearish chart. The shares are in a longer-term decline. SLG trades below the bearish 40-week moving average line. Bearish candles (red) and no lower shadows tells us that the bears are in control.
The weekly OBV line shows weakness the past two years. The MACD oscillator is bearish and poised to cross to the downside again for another outright sell signal.
In this daily Point and Figure chart of SLG, below, I can see that the software is projecting a potential downside price target in the $12 area.
In this second Point and Figure chart of SLG, below, I used weekly price data. Here the chart also suggests a price target in the $12 area.
Bottom-line strategy: The charts of SLG are not pretty and probably headed lower. Avoid the long side of SLG.
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Published: March 14, 2023 at 4:31 p.m. ET
Shares of Canadian Apartment Properties Real Estate Investment Trust Un CAR.UT advanced 1.45% to C$47.61 Tuesday, in what proved to be an all-around favorable trading session for the Canadian market, with the S&P/TSX Composite Index GSPTSE rising 0.54% to 19,694.16. Canadian Apartment Properties Real Estate Investment Trust Un closed C$8.38 below its 52-week high (C$55.99), which the company reached on March 22nd. Trading volume of 393,787 shares eclipsed its 50-day average volume of 368,416.
…
Shares of Canadian Apartment Properties Real Estate Investment Trust Un
CAR.UT
advanced 1.45% to C$47.61 Tuesday, in what proved to be an all-around favorable trading session for the Canadian market, with the S&P/TSX Composite Index
GSPTSE
rising 0.54% to 19,694.16. Canadian Apartment Properties Real Estate Investment Trust Un closed C$8.38 below its 52-week high (C$55.99), which the company reached on March 22nd. Trading volume of 393,787 shares eclipsed its 50-day average volume of 368,416.
Editor’s Note: This story was auto-generated by Automated Insights, an automation technology provider, using data from Dow Jones and FactSet. See our market data terms of use.
Paragonix Technologies — a company that launched in 2010 as a response to the lack of innovation in the donor organ preservation and transport process — closed a Series B funding round on Tuesday. The $24 million round was led by Signet Healthcare Partners.
The Cambridge, Massachusetts-based company provides transplant centers and organ procurement organizations (OPOs) with medical devices designed for the preservation and transportation of donor organs.
The traditional method of preservation requires the organ to be transported in a cooler of crushed ice. Due to unstable temperatures, many facilities that receive organs preserved in this manner report that they arrive frozen and damaged, said Paragonix CEO Lisa Anderson.
“Paragonix determined there was an opportunity for a more scientifically reproducible, measurable and reliable solution to transporting an organ from a donor to recipient,” she said. “We set out to create a new standard for organ preservation and transport that would provide the care and quality of handling commensurate with transporting such a valuable gift and improve patient outcomes worldwide.”
Paragonix’s devices are made from a series of interconnected systems that work together to provide a cool and sterile environment within a consistent range of 4-8° Celsius. The company sells three devices, each designed for a different organ (heart, lung and liver). All have been cleared by the Food and Drug Administration.
Each device works slightly differently based on specific user needs related to the organ type, Anderson said. For example, the heart preservation device has pouches filled with proprietary cooling solutions that keep the organ at optimal temperatures during transport. The heart is contained within a nested canister and is then housed in a wheeled shipper container that works to protect and insulate the inner contents.
All of Paragonix’s devices display the organ’s temperature while it is being transported. They also use bluetooth monitoring and tracking technology to allow surgeons to track the organ’s exact location throughout its journey, even in flight, Anderson pointed out.
Paragonix markets and sells its devices to transplant centers and OPOs across the U.S. and Europe. Last year, over one in five thoracic donor organs transplanted in the U.S. were preserved using a Paragonix device, Anderson declared. She also said that 19 out of the 30 largest U.S. heart transplant programs rely on Paragonix devices to safely preserve, track and transport organs to their intended recipients.
There are a few other companies that make devices to preserve donor organs, such as Organ Recovery Systems and Bridge to Life. But Anderson contended Paragonix’s devices are easier to use.
“Most other organ preservation devices are extremely complicated, labor intensive and require special personal or extensive training, while Paragonix’s devices are lightweight, user friendly, and a user can be trained in less than an hour,” she declared.
Anderson explained that her company’s main competition is the legacy way of transporting organs, as many organizations still receive damaged organs that were transported using the over-ice method. The medical industry needs to move away from this method of organ preservation because devices like the ones that Paragonix sells are clinically proven to improve patient outcomes and reduce the risk of post-surgical complications, she declared.
Picture: Getty Images, ThomasVogel
March Madness for REITs? Here's a 'final four' for investors seeking dividend income.
Published: March 17, 2023 at 2:14 p.m. ET
“Final four” is an eye-popping term, and will signal maximum excitement for fans of the NCAA Men’s Division 1 Basketball Tournament, when we see which teams win games among the “elite eight” on March 26.
But if you are an income-seeking investor who doesn’t want to risk dividend cuts during a long period of market turmoil that might be followed by a recession, a team of analysts at Jefferies led by Jonathan Petersen has already narrowed down a group of 76 publicly traded real-estate investment trusts to its own “final four.”…
“Final four” is an eye-popping term, and will signal maximum excitement for fans of the NCAA Men’s Division 1 Basketball Tournament, when we see which teams win games among the “elite eight” on March 26.
But if you are an income-seeking investor who doesn’t want to risk dividend cuts during a long period of market turmoil that might be followed by a recession, a team of analysts at Jefferies led by Jonathan Petersen has already narrowed down a group of 76 publicly traded real-estate investment trusts to its own “final four.” These are companies with good records for increasing payouts that Petersen expects to continue doing so over the next three years.
A REIT is a company that owns property or invests in mortgage-backed securities and distributes at least 90% of its earnings to shareholders as dividends, in return for tax advantages. Most dividends received by investors are taxed as ordinary income.
There are two broad types of REITs. An equity REIT holds property and rents it out. A mortgage REIT either operates as a lender, or invests in mortgage-backed securities, or both.
Narrowing an “elite eight” of REITs to the “final four”
In a report on March 17, Peterson wrote that among 76 publicly traded U.S. REITs that have existed for at least 15 years, only 22 have been able to avoid cutting their dividends. He noted that “the list of stalwart dividend payers isn’t heavily weighted to one subsector,” and added that the key to selecting the best performers for the next 15 years “boils down to the quality and durability of its current dividend.”
For its “elite eight” REITs, Jefferies narrowed the list to companies with “solid dividend outlooks,” before narrowing further to its “final four” that it rates a “buy” and are on the firm’s “conviction list.”
Here are the Jefferies “elite eight” REIT stocks, with the “final four” bolded and topping the list. Each group is sorted by current dividend yield. The right-most column has Jefferies’ expected compound annual growth rates (CAGR) for dividend payouts from 2022 through 2025.
NSA
LXP
PEAK
VICI
GLPI
AKR
O
KIM
Click on the tickers for more about each REIT. If you are interested in any individual stock, it is best to do your own research and form your own opinion about how successful a company is likely to be over the next decade at least.
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Don’t miss: 10 U.S. banks that have been the best earnings performers over the past 15 years — are any of them bargain stocks now?
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