Real estate stocks with big exposure to retail properties took a big hit from COVID-19 disruptions.
Here are two examples.
STORE Capital: Dividend Stock Yielding 5.6%
STORE Capital (NYSE:STOR) fell as much as 65% from last year’s high. Then, the dividend stock developed a base in the $16-18 range for about three months before appreciating approximately 46%.
Source: Stockcharts with author annotation
It still offers a nice yield of 5.6%. And it still trades at a discount of about 20% from its normalized valuation. However, it’s meeting short-term resistance right now at about $26. The price action in the next two weeks will tell us if it’ll break above it or not.
The commercial real estate company has a diversified portfolio consisting of 2,552 properties across 49 states and 491 customers who operate across 113 industries.
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Here’s how you can get $2,000 (or more) per month permanently.
Unless you think brick-and-mortar retailers and offices are dead, now is a great time to buy depressed real estate investment trusts (REITs) in these sectors because of the COVID-19 impacts.
For example, during this COVID-19 pandemic, I bought positions in Brookfield Property Partners (TSX:BPY.UN)(NASDAQ:BPY) / Brookfield Property REIT (NASDAQ:BPYU), H&R REIT (TSX:HR.UN), SmartCentres REIT (TSX:SRU.UN), and STORE Capital Corp (NYSE:STOR).
Near-term Risk Exists in REITs, As Does Long-term Opportunity!
Don’t get me wrong. In the near term, there’s indeed high risk. These REITs that have large retail or office exposure can continue to be depressed and slash their dividends.
H&R REIT only collected 50% of its retail rents but 80% of its total rents in May. Enclosed malls are doing the worst during the pandemic as other than essential services tenants like grocery stores, others had to be shut down at one point or another to keep the public safe.
In April, I suspected that H&R REIT could cut its cash distribution in half. And in fact, it cut its cash distribution by 50% in May. That said, the stock still offers a nice yield of 7.1% at CAD$9.70 per unit.
Source: F.A.S.T. Graphs with author annotation
I still believe H&R REIT can trade at CAD$19 per share in the future. That’s almost a double! As well, it’ll be able to restore its cash distribution to higher levels in a normalized market. Meanwhile, buyers today get paid a handsome passive income to wait.
Brookfield Property Partners LP’s (TSX:BPY.UN)(NASDAQ:BPY) / Brookfield Property REIT’s (NASDAQ:BPR) Core Retail business is resilient, and it’s going through a phase of redevelopment to be more relevant in today’s retail environment.
The REIT’s Core Office business is doing well.
Realized gains reduced 2019 payout ratio from 95% to 84%.
We’re comfortable with BPY’s token raise (+0.8%) of the Q1 2020 cash distribution, as the yield is high at 7.3%.
Financial Overview for Q4 and 2019
Funds from operations (FFO) per unit (excluding opportunistic portfolio investment gains) declined 6% for 2019 against 2018. However, BPY stock did increase its cash distribution by 4.8% year over year.
Based on FFO only, the payout ratio was 95%. Thanks to the investment gains from its opportunistic portfolio, the actual payout ratio (based on “total earnings”) is lowered to 84% for 2019. Although this is higher than the 60% range in the previous years, it’s still sustainable.
Capital Recycling Program
BPY has been consistently able to sell assets in the opportunistic portfolio or mature assets at higher than their accounting values and recycle that capital into properties with expected higher returns.
In 2019, BPY sold $3.3 billion of assets at 6% higher than their accounting values and generated net proceeds of $1.8 billion that were deployed at higher returns.
Management expects to continue this capital recycling program of stabilized or mature assets to achieve net proceeds of $1.5-$2.0 billion for redeployment.
Token Dividend Increase; Dividend Yields 7.3%
Admittedly, BPY’s 2019 payout ratio of 95%, based solely on FFO, was higher than normal. Its average payout ratio (based solely on FFO) from 2014 to 2018 was 85%.
